Tax Bulletin Issue 22

INLAND REVENUE TAX BULLETIN 
Issue 22

CONTENTS

Self Assessment

• 1996-97 partnership assessing (Article deleted since index 2004)
• Carry back of personal pension contributions made in 1996-97 (Article no longer current)
• Deadline for new failure to notify chargeablity -- 5 October 1996 (Article deleted since index 2004)

Effective dates of payment

Bank and building society interest:

• Claiming tax back on behalf of people who are unable to act for themselves

Pension Schemes Office

• Inspection visits (Article deleted since index 2004)

Petroleum Revenue Tax

• Expenditure claims (Superceded by OTO4780 onwards)

Schedule D Cases I & II

• Use of mileage rates in computing car expenses (Superseded by BIM47701 onwards)

interpretations

Capital Gains Tax

• Compensation payable to agricultural and business tenants

Corporation Tax

• Foreign Income Dividends (Article no longer current)
• Transition to Pay and File: Interest of repayments resulting from relief carry-backs (No longer relevant)

Enterprise Investment Scheme:

• Raising money for qualifying business activities

Foreign loan interest and tax credit relief (Article no longer current)

Schedule D Cases I & II

• Incidental costs of loan finance: timing of deductions (Superseded by BIM45815)

miscellaneous

Taxation of French national service volunteers in the UK

Tax treaty network

• Annual update (Article no longer current)

Group income election

• Section 247(4) (Article no longer current)

Inheritance tax and penalties(Article no longer current)

Corporation tax

• New return form (Article no longer current)

Statements of Practice and Extra-Statutory Concessions

! This Article Is No Longer Current (Deleted Index 2004)

SELF ASSESSMENT AND 1996-97
PARTNERSHIP ASSESSING

This article explains the relationship between the 1996-97 partnership assessment and the Self Assessment (SA) returns for that year issued to partnerships and partners. It expands on an earlier article, "Self Assessment: New procedures for taxing partnerships", Tax Bulletin Issue 12 (August 1994, pages 146-148) and includes details of:

• the proposed arrangements for allocating partner's allowances, reliefs and rate bands;
• the effect of appeal and postponement applications against partnership assessments;
• the limited circumstances where profits can be agreed and appeals against 1996-97 partnership assessments determined prior to receipt of SA partnership returns;
• how tax and Class 4 National Insurance Contributions (NIC) assessed on the partnership will be taken into account in the partner's self-assessment;
• how we intend to deal with SA partnership returns in tax offices from April 1997 where there is a 1996-97 partnership assessment.

1996-97 is the first year of Self Assessment. New style SA returns will be issued to all partnerships requiring a return of partnership profits. In addition, every partner will be required to make a return of his or her share of any partnership profits and to include this share of partnership profits in his or her self-assessment for 1996-97. But, as part of the transitional arrangements for SA, most partnerships -- 'old partnerships' -- will also receive a composite partnership assessment of total trading or professional profits for 1996-97.

OLD PARTNERSHIPS

A partnership assessment will only be made for 1996-97 if the partnership is an "old partnership".

A partnership whose trade or profession commenced before 6 April 1994 is an "old partnership" up to the date of any change in its membership which occurs after that date. The partnership will remain an "old partnership" if at such a change in membership, the partners elect under Section 113(2) Income and Corporation Taxes Act (ICTA) 1988 for the continuation basis of assessment to apply. It will continue to be an "old partnership" until there is a change of membership for which no election is made.

NEW PARTNERSHIPS

A "new partnership" is a partnership whose trade or profession commenced on or after 6 April 1994 or one which commenced earlier, but whose trade or profession is treated as commencing on or after 6 April 1994 because on a change in membership no Section 113(2) ICTA 1988 election was made.

PAYMENT OF TAX ON PROFITS MADE BY "NEW PARTNERSHIPS"

A partnership assessment will not be made on a "new partnership" for 1996-97. Instead, the arrangements for individuals will apply and the partners will be required to make payments on account on their self-assessment, based on the relevant amount of tax and Class 4 NIC assessed on them for 1995-96. This includes the tax and Class 4 NIC payable on their share of the partnership's trade or professional profits. The payments on account will be due on 31 January 1997 and 31 July 1997 with any balancing payment having to be made by 31 January 1998.

CHANGE IN PARTNERSHIP DURING 1996-97

If during the period 6 April 1996 to 5 April 1997 there is a change in membership of an "old partnership" and a continuation election is not made in respect of that change, then:

• for the period up to the date of change, the partnership is an "old partnership",
• for the period thereafter, the partnership is a "new partnership".

The rest of this article is concerned only with the new SA rules as they apply for 1996-97 to "old partnerships" and the members of such partnerships.

1996-97 PARTNERSHIP ASSESSMENTS

In the case of an "old partnership", the 1996-97 partnership assessment is the means of collecting tax and Class 4 NIC due on the partnership's trade or professional profits. Because the assessment is on the partnership, each partner is jointly liable for the tax due. 1996-97 is the last year for which composite partnership assessments will be issued and for which the joint liability rule will apply. All of the relevant pre-Self Assessment rules apply to these assessments, including the existing 1 January and 1 July payment dates, arrangements for appeals, postponement applications and interest where payment is late. But these rules must be operated in tandem with the new rules applying to SA partnership returns.

SA PARTNERSHIP RETURN

In April 1997, a Self Assessment return will be issued to every partnership requiring a return of the partnership's income, profits and disposals of capital assets and the allocation of those items between the partners.

SA RETURN FOR INDIVIDUAL PARTNERS

In April 1997, each partner will also be issued with their own personal SA return. They will be required to send in their completed return by 30 September 1997 if they wish the Revenue to calculate the tax due, or by 31 January 1998 if they intend to do the calculation themselves.

If they are a member of an "old partnership", they will have to include in their return their share of the trade or professional profits. But to ensure that these profits are not assessed twice, the partners will be entitled to a credit for their share of the income tax and Class 4 NIC assessed on the partnership against their individual liability. An explanation of how this will work is contained later in this article under the heading 'Partner's Tax Credit'.

In the simplest situation, where a partner's only source of income is his or her share of the partnership's trading or professional profits, all of the tax and Class 4 NIC due for 1996-97 will be collected through the partnership assessment.

REASON FOR PARTNERSHIP ASSESSMENTS

There are two main reasons why partnership assessments are being issued for 1996-97. First, the assessment will not be based solely on the profits of the current year, but will normally be an average profits figure. It was decided that tax should remain a liability of the partnership for 1996-97, so that the partners could decide amongst themselves the fairest way of dividing the tax bill between them.

Second, SA requires payments on account to be made. The amounts to be paid are based on the tax assessed for the previous year. The Revenue will normally notify the amount to be paid on account to taxpayers but this is not practicable for continuing partnerships where the profits for the previous year were included in a partnership assessment. Therefore, partnership assessments are being issued for one last year. For 1997-98 we will be able to calculate payments on account from the partner's 1996-97 self-assessment. 1996-97 is the last year where allocation of the profit between partners is based on the tax year 6 April 1996 - 5 April 1997.

ISSUE OF PARTNERSHIP ASSESSMENTS

Following our practice in previous years, the 1996-97 composite partnership assessments will normally be issued between August and November 1996.

They will initially be made in estimated figures because, although transitional rules apply, 1996-97 is the first year of 'current year' assessing. In other words, the basis period for 1996-97 in all cases will end in that tax year. Indeed, for many partnerships the basis period for 1996-97 will not have ended when the assessment is issued.

As now, partnership assessments will be supplemented by 'partner's statements'. These will show each partner's share of the partnership's trading or professional profits for 1996-97, the personal allowances and reliefs to which they are entitled and the income tax and Class 4 NIC due on that share of profits.

ALLOCATION OF PERSONAL ALLOWANCES, RELIEFS AND RATE BANDS

Where there is a partnership assessment and a partner has another source of income, ie other than their share of the partnership's trading or professional income, a decision has to be made on how to allocate allowances, reliefs and rate bands to which the partner is entitled.

Legislation requires that some allowances and reliefs are to be given against specific classes of income. If these rules do not apply, the allowance or relief is given in such a way as to minimise the individual's tax liability. In addition, some income has to be treated as the "top slice" of income for the purpose of allocating rate bands.

Personal allowances are an example of where legislation does not lay down rules as to how they are to be allocated In the past our policy has been to allocate such allowances in accordance with the wishes of the taxpayer, or his or her agent, if such a request can be accommodated.

Where no request is made, allowances have been allocated against the income on which tax is first payable. This policy, which is designed to give a result which generally works to the taxpayer's advantage, will continue to apply for 1996-97.

Unless legislation specifies that another order should be applied, for 1996-97 allowances, reliefs and rate bands will be allocated:

• first against any Schedule E income,
• then against the share of profits included in the partnership assessment, and
• any balance will be taken into account in any further tax due in the partner's self-assessment.

This is a different order from that which we would normally have applied in previous years. A partner may have income from property, etc which in past years has been covered by allowances or separately assessed. For 1996-97 the partner will need to make payments on account of the tax payable on this income on 31 January 1997 and 31 July 1997 and any balancing payment on 31 January 1998.

Since the SA payments on account are calculated by reference to the tax assessed for the previous year, there should be a timing advantage to the partner in having their allowances given against the partnership's trading or professional profits. This will reduce the tax payable by the partnership on 1 January and 1 July 1997 rather than the personal tax due under the SA rules at a later date.

When the estimated partnership assessments and partner's statements are issued in the autumn of 1996, they will reflect any allowances which partners have claimed in their 1996 tax return (or for which they have otherwise established their entitlement).

If a partner, or agent, wants the allowances, reliefs or rate bands to be allocated in a different way, they should inform the tax office when appealing against the partnership assessment. No objection will be made to any reasonable request.

APPEALS AND POSTPONEMENT APPLICATIONS

The mechanisms for appeals and postponement applications against 1996-97 partnership assessments will operate in the same way as in past years.

It may initially be difficult to make an accurate postponement application when an appeal is made against the partnership assessment. This is because the partnership liability for 1996-97 is based on the accounting period ending in that year. When the appeal is made, the accounting period may not have ended and even if it has ended it is unlikely that there will have been time to prepare accounts. Where accounts have been prepared, the postponement application should be made in line with these accounts.

If a postponement application proves to be inaccurate, a revised application should be made as soon as a clearer idea of the amount of the profits to be assessed for 1996-97 emerges. More than one postponement application may be needed.

ACCOUNTS AND ACCOUNTS INFORMATION

Under Self Assessment, accounts information will be required in a standard format in the Partnership return. A completed return, including standard accounts information, will be required in every case. Submission of accounts and computations by themselves will not constitute a valid return, although their submission with the return may be necessary in some cases in order to make a full disclosure.

However there may be circumstances where the partnership may need to send in accounts and computations prior to the issue of Partnership return. Examples include situations where:

• the account ends after 5 April 1996 but must be used to determine the profit assessable for 1995-96 or an earlier year;
• the account shows a loss which is the subject of a claim to which effect can be given;
• one or more of the partners is a company.

In these cases, we will deal with them when they are submitted.

In addition, in the case of an "old partnership", we will deal with any accounts and computations we receive before the issue of the partnership return in April 1997 as quickly as possible with a view to agreeing the partnership assessment at an early date.

Where computations are agreed and any other matters relating to the appeal are also settled, the Inspector will seek to determine the appeal against the partnership assessment under Section 54 Taxes Management Act (TMA)1970 in the normal way. But the partnership will still be required to complete a SA partnership return for 1996-97 providing the information required in the prescribed format.

If we cannot agree the computations we may make enquiries, but these would follow the new approach for SA enquiries. In particular, reasons may not be given for commencing enquiries.

Where computations have been agreed in advance of submission of the partnership return, we will not subsequently enquire into the agreed partnership profits. The only basis on which such enquiries would be made would be under the discovery legislation.

The agreement of accounts and computations in one of these limited circumstances is designed to ensure that, where the pre-and post- SA legislation interact in respect of any period of account, we can deal with the effect of the old legislation as early as possible. This is a transitional arrangement and will not be continued for 1997-98 or later years.

EARLY FILING OF PARTNERSHIP SA RETURNS

In order to ensure that the first year of SA runs smoothly, we hope that partnerships will file their 1996-97 partnership SA return as early as possible. These returns will be given priority in tax offices.

The return will be checked upon receipt and may be repaired. In cases where the trade or professional profits have not already been agreed on the basis of the prior submission of accounts and computations, we will agree the figures at this stage or raise enquiries. The appeal against the partnership assessment will also be determined if possible, although this may depend upon claims for allowances and reliefs in the partner's SA returns.

Once the SA partnership return has been filed and the assessment is final, the Revenue will not make any enquiries other than under the discovery legislation.

Early filing of the partnership SA return will have advantages for partnerships, partners, their agents and ourselves. It will:

• provide early certainty over the level of partnership profits, the partnership income tax and Class 4 NIC liability and consequently the credit to which each partner is entitled in his or her self-assessment;
• avoid the need to amend the partners' SA returns to reflect changes in the partnership tax position;
• assist us in processing partnership and partners' SA returns;
• spread processing work in the first year of SA.

There have been suggestions in the press that early submission of a Self Assessment return may increase the chance of it being selected for an enquiry. This is not the case. The Revenue policy is, and will continue to be under SA, to concentrate compliance activity on those areas where there appears to be a high risk of a loss of tax.

PARTNER'S TAX CREDIT

For 1996-97, partners will be required to self-assess their total income in their SA tax returns. The partner's self-assessment will have to include items already dealt with in the composite partnership assessment, namely:

• his or her share of the partnership's trading or professional income;
• any allowances and reliefs taken into account in arriving at the partnership's tax liability;
• a notional tax credit for the partner's share of assessed tax.

The statutory rule for the notional tax credit is contained in para 3 Schedule 21 Finance Act 1995 which describes the credit:

"....as if his share of any income tax to which the partnership is assessed for that year were income tax which in respect of that year had been deducted at source."

We have previously described the credit as the tax paid by the partnership on a partner's share of partnership profit. (See leaflet SAT2 (1995) paras 3.123 to 3.125 and Tax Bulletin Issue 21 (February 1996 page 286.)) But strictly the credit arises in respect of the tax assessed. There is no restriction to this credit where some part of the partnership tax assessed is still unpaid when the partner completes his or her SA Return. But equally, the final credit figure may not be known when the partner completes his or her SA return, for example, because the composite partnership assessment is still in estimated figures.

PURPOSE OF THE PARTNER'S TAX CREDIT

The purpose of the tax credit in the partner's return is to eliminate from the tax liability arising from the partner's own self-assessment, the tax payable on the partnership's trading or professional income.

Where the partnership assessment is final, at the time the partner's SA return is completed, the tax credit to be claimed by the partner is his or her share of the tax shown in the partnership assessment. The total of the credits for all of the partners will equal the tax assessed on the partnership. It is not necessary to consider the payment position when claiming the credit.

Where the partnership assessment is not final, the credit claimed will be a provisional figure which will need to be repaired when the partnership's tax liability becomes final. The provisional figure should normally be the partner's share of the tax payable in accordance with the partnership's latest postponement agreement with the Inspector, or determination by the Commissioners, under Section 55 TMA 1970. But we recognise that there be circumstances where it may be appropriate to claim a different figure. A return containing a provisional figure of tax credit will not be regarded as incomplete. The return will be repaired when the tax credit is finally agreed.

The individual partner will only be given credit for tax on the share of the partnership profits attributed to him or her, less the allowances or reliefs taken into account in the partnership assessment. The credit cannot differ from that sum, regardless of what the individual partner may have paid. This is because the individual partner's self-assessment must reflect the position in the partnership assessment.

References to tax credit apply equally to Class 4 NIC.

Example

The following example illustrates some of the principles set out in this article.

Mr Smith and Mr Brown have carried on business in partnership for many years. The partnership normally draws up its accounts to 30 June each year but for the transitional year 1996-97 draws up a two year account to 30 June 1996. This shows a trading profit of £80,000 and so the profit to be assessed for 1996-97 is £40,000 (£80,000 x 50%).

For 1996-97 profits must be allocated according to the profit sharing arrangements in force for the period 6 April 1996 to 5 April 1997. In that period profits were allocated 40% to Mr Smith and 60% to Mr Brown.

Each partner has no other source of income and is only entitled to the basic personal allowance.

The 1996-97 partnership assessment is as follows:
Profits                        £40,000
less Capital Allowances         £4,000
Net Assessment                 £36,000Allocation between partnersName of partner   Share  Tax on share  Class 4 NIC
Mr Smith                     £14,400   £2,396.40       £452.40
Mr Brown                     £21,600   £4,124.40       £884.40
Net amount payable                     £6,520.80     £1,336.80

Both partners are jointly liable for the whole of the tax and Class 4 NIC payable. But to calculate the tax and Class 4 NIC due the profits must be allocated between the partners. The tax and Class 4 NIC due on each share is as follows:

                              Mr Smith         Mr Brown
Share of profit                    	£14,400				£21,600
Personal Allowance                  £3,765           	£3,765
Net chargeable to tax              £10,635           £17,835Mr Smith
3,900 x 20%                        £780.00
6,735 x 24%                      £1,616.40
Net tax payable                  £2,396.40Mr Brown
3,900 x 20%                        £780.00
13,935 x 24%                     £3,344.40
Net tax payable                  £4,124.40                              Mr Smith        Mr Brown
Class 4 NIC Profit                  £14,400            £21,600
Lower limit                         £6,860           £6,860
Charged at 6% on                    £7,540          £14,740
Amount payable                      £452.40          	  £884.40

These calculations are shown in the "partner's statements" which are issued to the partners, and their agents, at the same time as the partnership assessment.

In their 1996-97 personal Tax Return each partner will need to include their share of the partnership profits and to claim a credit for the tax and class 4 NIC payable on their share of that profit. The figures will be as follows:

                             Mr Smith       Mr Brown 
Share of Profit                    £14,400          £21,600
Income Tax credit                £2,396.40        £4,124.40
Class 4 NIC credit                 £452.40          £884.40

ISSUE OF GUIDE

A booklet called "A Guide to your partnership tax assessment" will be issued with each 1996-97 partnership assessment and partner statement. The booklet will explain how the 1996-97 partnership assessment fits into the SA system.

If you have any enquiries arising from this article please write to:

Mr J. Pengelly
8th Floor
10 Maltravers Street
London
WC2R 1LB.

! This Article Is No Longer Current (Deleted Index 2001)

SELF ASSESSMENT:
CARRY-BACK OF PERSONAL PENSION
CONTRIBUTIONS MADE IN 1996-97

This article explains how the Revenue will treat payments made to personal pension schemes and retirement annuity contracts in the tax year 1996-97, where the payments are carried back to the tax year 1995-96. It considers the consequences for:

• calculating the amount of tax relief
• repaying any tax overpaid
• setting the levels of payments on account for 1996-97.

PERSONAL PENSION AND RETIREMENT ANNUITY RELIEF

Taxpayers get relief for contributions to personal pension schemes and retirement annuity contracts by setting their payments against their earned income. The amount eligible for relief is calculated for a year of assessment by reference to certain percentage limits of the taxpayer's earnings for that year. Where relief is not fully used in a year, taxpayers may elect to have payments made in the following year, carried back (i.e. treated as if they had been made in the earlier one) to sweep up the unused relief. (Sections 619 (4) and 641 Income and Corporation Taxes Act 1988.)

TREATMENT OF PAYMENTS MADE UP TO 5 APRIL 1996 (1995-96)

At present, where tax relief is available in year 1 and a payment made in year 2 is carried back to sweep up the unused relief, the Revenue:

• amend the assessment of year 1,
• set the tax reduction against any amount of tax outstanding or make a repayment.

For example, if the relief for year 1 amounted to £2,000 but only £1,000 was paid in the year, then a further payment of £1,000 could be carried back from year 2 to year 1. The Revenue would amend the year 1 assessment to give tax relief for the further £1,000 and repay tax and interest if appropriate. The election to carry-back must reach the Inspector of Taxes no later than the 5 July following the tax year of payment.

TREATMENT OF PAYMENTS MADE UNDER SELF ASSESSMENT

Some changes to the present arrangements have been made to take account of the introduction of Self Assessment. These changes were first introduced in Section 107 Finance Act 1995. The position was amended by Clause 128 and Schedule 17 Finance Bill 1996 and the new rules all start on 6 April 1996. In addition, Clause 135 and Paragraphs 17 and 18 of Schedule 21 to the Finance Bill 1996, extend the time limit for making an election to carry-back to 31 January following the tax year in which a payment is made. This will apply for payments made in 1996-97 and subsequent years.

The new rules mean that under Self Assessment where tax relief is available in year 1, carrying back a payment made in year 2 has the following effect:

• the tax relief due is calculated in relation to the income and tax rates for year 1;
• it gives rise to a tax credit which can be repaid or set against outstanding liabilities.

But it does not:

• amend the assessment for year 1, nor
• reduce the level of payments on account for year 2 which have been set by reference to the year 1 assessment.

If the rules under Self Assessment were applied to the example above, the relief for the additional contributions of £1,000 in year 2 carried back to year 1 would result in a tax credit for year 2 calculated at the tax rates of year 1. This tax credit could then be set against any outstanding tax liabilities or, if preferred, claimed as a repayment.

These changes maintain the flexibility of the current arrangements and the amount of relief. But under the Self Assessment rules, the earlier year's assessment will not be amended.

REPRESENTATIONS AND PRESS COMMENTARY

The Revenue received representations from taxpayers, advisers and the Pensions Industry which indicated that they expected contributions made from 6 April 1996 to 5 April 1997 to amend the 1995-96 assessment and to affect payments on account for 1996-97, due on 31 January and 31 July 1997. They therefore expected to be able to continue to pay contributions throughout 1996-97 and have contributions affect the 1995-96 assessment, as they would now. Additionally, some press articles have led to further uncertainty about the exact way in which the new rules would operate.

TREATMENT OF PAYMENTS MADE IN 1996-97

In response to the concerns expressed, the Revenue issued a Press Release "Carry-back of personal pension contributions made in 1996-97" on 21 March 1996. It said that "...where qualifying personal pension contributions are paid in the tax year 1996-97 but are carried back for relief to 1995-96, the Department will take those contributions into account when setting the level of any payments on account required for 1996-97 under self assessment. This change responds to representations from the Pensions Industry and others about the interaction between the personal pension rules and the introduction of self assessment.".

What this means is that where tax relief is available in the year 1995-96, a payment carried back from 1996-97 will:

• amend the 1995-96 assessment,
• reduce the level of the payments on account for 1996-97 to take account of the amendment, to the 1995-96 assessment,
• give rise to a repayment of tax or, where tax is owing, reduce the amount outstanding.

This treatment will not change the amount of relief obtainable, nor the dates upon which payments are required under Self Assessment. But by amending the 1995-96 assessment and changing the amounts of the payments on account that are payable for 1996-97 it maintains the current practice for a further year and gives taxpayers, their advisers and the Pensions Industry longer to become familiar with the new rules.

! This Article Is No Longer Current (Deleted Index 2004)

SELF ASSESSMENT:
DEADLINE FOR NEW FAILURE
TO NOTIFY CHARGEABILITY--
5 OCTOBER 1996

The Self Assessment agents' pack issued to all tax practitioners in June 1995 included an A3 "Timetable for Self Assessment". The 1996 column had an entry as follows:-

" 5 October 1996

• deadline to advise the Inland Revenue on all income for 1995/96 tax year."

This is meant to explain the new time limit for notifying chargeability to tax under Section 7 Taxes Management Act 1970. We understand that this is being confused with the current deadline for sending in returns to avoid an interest charge i.e. 31 October 1996. We would like to clarify the position and are sorry if it was ambiguous before.

Paragraph 1, Schedule 19 Finance Act 1994 changes the time limit for notification of chargeability from 12 months after the end of the tax year to 6 months (i.e. by 5 October after the end of the tax year). This new limit applies for the tax year 1995-96 onwards.

The date in Statement of Practice 6/89 (Delay in rendering tax returns - Interest on overdue tax) is unchanged for this year at 31 October 1996. So it will continue to apply for 1995-96 returns. The 5 October date is relevant only in the context of the need to notify chargeability if a return has not already been issued by the Inland Revenue by that date.

EFFECTIVE DATES OF PAYMENT

As one of the changes in the move to Self Assessment, Finance Act 1994 introduced legislation specifying that where, after 5 April 1996, payment is made by cheque, it shall be treated as having been made on the day the cheque is received. This provision related to the calculation of interest and repayment supplement on income tax, corporation tax, capital gains tax and Class 4 NICs. Changes have also been made to Regulations to apply similar treatment, from 19 April 1996, to payments in respect of PAYE, the Subcontractor's Scheme, and Class 1 and Class 1A NICs, and from 22 April in respect of Gilt Interest.

Payments to the Inland Revenue are made in a variety of ways as well as by cheque. The following table identifies the different methods of payment and gives details of when payment will be deemed to have been made for each method.

These rules will apply to all payments of income tax, corporation tax, capital gains tax and NICs from 6 April 1996, (or 19 or 22 April 1996 as above), and were announced in an Inland Revenue Press Release on 1 April 1996.

EFFECTIVE DATES OF PAYMENT

Payment method                           Effective date of payment______Cheques, cash, postal orders
General, including payments handed       The day the Revenue receives 
in to the Revenue                        the payment.
Exceptions 
Where payment is received by post     The day that the office was 
following a day when the office has   first closed.
been closed, for whatever reason,
including a weekend

Electronic Funds Transfer (EFT)     One working day immediately  
                                         before the date that value is 
                                         received.
Payments by CHAPS and BACS **
A working day is defined as a 
                                         Bank of England working day.
Bank Giro payments                    Three working days prior  
                                         to the of processing.
                                         This applies to both Bank Giro  
                                         on tape and clerical Bank Giro 
                                         payments.
Girobank payments                      Three working days prior to  
                                         the date of processing. 

**BACS is an EFT System through which Bank-sponsored organisations make payments through BACS into accounts at any bank branch in the United Kingdom. CHAPS is also an EFT System providing same-day settlements for high value inter-bank payments and is used by the 12 settlement banks and the Bank of England.

The Revenue's practice on payments by BACS and CHAPS was announced in an Inland Revenue News release of 1 April 1993 and will continue to apply for all payments of tax by EFT.

BANK AND BUILDING SOCIETY INTEREST:
CLAIMING TAX BACK ON BEHALF
OF PEOPLE WHO ARE UNABLE
TO ACT FOR THEMSELVES

Banks and building societies automatically take tax off the interest they pay to savers. (Previously basic rate tax but, from 6 April 1996, lower rate tax.) This arrangement suits the majority of savers as it means they pay the right amount of tax on their interest without having to take any action themselves.

In addition, people who do not have to pay tax on their interest can:

• tell their bank or building society not to take tax off in future;
• claim the tax back from the Inland Revenue.

We have run a number of campaigns over the last few years to encourage people on low incomes to register for payment of gross interest and to claim tax back. They have been very successful. But we have also been looking for ways to make all this easier for someone who is incapable of managing their own affairs.

In March 1994, we changed the regulations to allow Department of Social Security (DSS) appointees to register with a bank or building society to receive gross interest on behalf of someone who is incapable of managing their own affairs.

Now we have made some changes to our procedures to make it easier for DSS appointees to claim tax back for these people.

Various people can claim tax back on behalf of someone who cannot sign a claim form themselves but, until now, a DSS appointee could do this only if no next of kin was able or willing to act and the repayment was no more than £75. We now accept claims from DSS appointees in other circumstances.

The following people can make claims on behalf of someone who is incapable of managing their own affairs:

• in England and Wales -- a receiver (or other person) appointed by the Court of Protection, or an attorney acting under a registered enduring power of attorney;
• in Northern Ireland - a controller appointed by the High Court, or an attorney acting under a registered enduring power of attorney;
• in Scotland -- a curator bonis, a tutor dative with financial powers or other judicial factor, or an attorney acting under a power of attorney granted after 31 December 1990;
• the next of kin where the repayment is either (i) under £900, or (ii) does not exceed £1,800 and the person's income (ignoring income from trusts, annuities, pensions and covenants) does not exceed £900;
• a DSS appointee for tax of up to £100 for each tax year; and
• a DSS appointee for tax of more than £100 for each tax year where there is no obvious next of kin and either (i) the repayment for the year is under £900 or (ii) the repayment does not exceed £1,800 and the person's income (ignoring income from trusts, annuities, pensions and covenants) does not exceed £900.

Inland Revenue Offices dealing with repayments and tax offices will accept claims signed by a DSS appointee on behalf of a person who is incapable of managing their own affairs in these wider circumstances.

When a claim is made, a copy of DSS form BF57 giving authorisation to act as appointee, or a DSS letter of confirmation of appointment, should be provided with the claim. Where the DSS appointee is a provider of services (for example, residential or nursing care) to the person who lacks capacity, or a corporate body (which includes local authorities), or an individual acting for a corporate body, we will also ask for details of the financial accounting procedures.

Our literature, and in particular the booklet IR110 "A guide for people with savings", is being amended to reflect this change. This booklet helps savers to work out if they can register to get interest paid without deduction of tax and tells them how to claim tax back. It includes a registration form (R85) and a tax repayment form (R40) and is available from Tax Enquiry Centres and tax offices.

We are happy to help people with enquiries about registering for gross interest or claiming tax back and further information may be obtained as follows:

• for general enquiries, a Tax Enquiry Centre or a tax office (details are in your telephone book under "Inland Revenue"), or the Inland Revenue helpline (0845 9800 645), and
• for enquiries about DSS appointees, the appropriate office from the list of addresses given in the booklet IR110.

! This Article Is No Longer Current (Deleted Index 2004)

PENSION SCHEMES OFFICE:
INSPECTION VISITS

As explained in the article in Tax Bulletin Issue 21 (February 1996, page 290), the Retirement Benefits Schemes (Information Powers) Regulations 1995 (SI 1995 No. 3103) came into force on 1 January 1996.

Regulation 14 gives the Inland Revenue the authority to inspect books, documents and other records relating to, in effect:-

• any monies paid into a tax approved occupational pension scheme,
• any investments or other assets of the scheme, and
• any monies paid out of the scheme.

The people to whom notices to inspect records may be issued include the legal administrator, the trustees and the participating employers of the scheme. The inspection power also extends to any person who provides, or has provided, administrative services to the scheme. This is because it is common for pension schemes to delegate various day to day administrative functions to third parties, such as insurance companies or other specialist pensions practitioners. As a consequence, some accountants, actuaries and members of other professions may be approached. But, under these regulations, enquiries will be limited to the records relating to work of an administrative nature. The regulations do not provide for the inspection of records relating to any advice given by the professional adviser.

The Pension Schemes Office (PSO) intend making full use of these new powers and aim to establish a rolling programme for visiting the larger pension practitioners and bigger pension schemes and a selective programme for the smaller practitioners and schemes.

These pension scheme related inspection visits are a new extension of the Department's compliance activities and we are grateful to those practitioners who allowed us to make educational visits to see how a cross-section of our customers operate. Following on from those visits and using plans modelled on the operating methods employed by other Inland Revenue Offices, visits commenced at the end of February 1996 and followed the procedure set out below.

• Issue the statutory notice giving a minimum of 28 days warning of the intention to make an inspection visit, stating in broad terms what records we wish to see.
• Arrange a preliminary meeting with the organisation concerned to discuss precisely what records will be inspected, and decide -- with them -- the best way of going about it (even with a small sample of six organisations visited, we observed significant differences in the way they were organised).
• Make the audit visit.
• At the end of the audit hold a summing up meeting to give our initial findings and explain which items, if any, are going to be the subject of follow up enquiries e.g. verifying final remuneration with the Inspector of Taxes.
• Within 28 days of the visit send the organisation a written audit report of findings, together with any recommendations and a list of any individual cases which may still be under enquiry.
• Those on-going cases to be followed up individually by correspondence.

Initially we intend to focus on compliance with the tax rules for benefits paid and the funding of pension schemes and the underlying information necessary to comply with those requirements. But we are empowered to look at any aspects of the administration of schemes, and so will expect to cover other areas in each visit. We will broaden our audits in the light of experience.

The procedure outlined above will be thoroughly and frequently reviewed in the light of the findings and customers' feedback, so that it can evolve into an effective and efficient framework for compliance audits. Once we have gained sufficient experience to settle our practice we intend to issue a Code of Practice on scheme audits similar to those issued by other parts of the Inland Revenue.

(Superceded by OTO4780 onwards)

PETROLEUM REVENUE TAX:
EXPENDITURE CLAIMS

CHANGE OF PRACTICE

Qualifying expenditure is relieved for Petroleum Revenue Tax (PRT) under rules set out in the Oil Taxation Act 1975. The previous practice of the Department was to allow an expenditure claim to be withdrawn only in limited circumstances. But, in the light of recent legal advice, the Board now accepts that a claimant may withdraw any claim or part of any claim to the extent that a decision has not been taken on it in respect of the withdrawn expenditure in question.

Oil industry representative bodies were recently advised of this change of view in the following terms:-

"Withdrawal of Expenditure Claims

You will be aware that we have recently received advice on this topic. I am writing now to confirm our change of practice following that advice. We are advised that any claim can be withdrawn to the extent that a decision has not been taken on it in respect of the withdrawn expenditure. But where a decision has been taken to allow some, or all, of the claimed expenditure, that claim, or part of the claim as appropriate, cannot be withdrawn. The withdrawn expenditure may be included in a fresh claim, provided that the conditions for making such a claim are still satisfied (for example that the time limit for claiming the expenditure relief has not expired).

There is no change in the Board's view of a claim for supplement, which, if it is claimed, must be included in a claim for the associated expenditure. It follows that if a claim for expenditure qualifying for supplement is withdrawn, then so also is any associated supplement claim. To the extent that a decision has not been taken on the claim in respect of expenditure identified as qualifying for supplement, the claimant can withdraw the claim which must include the associated supplement. The claimant may make a fresh claim for the expenditure (subject to the conditions for submitting the claim still being satisfied) without the expenditure necessarily being identified as qualifying for supplement."

(Superseded by BIM47701 onwards)

SCHEDULE D CASES I & II:
USE OF MILEAGE RATES IN
COMPUTING CAR EXPENSES

We are aware that some self-employed taxpayers with low turnovers have arrangements with their Inspectors under which the motoring expenses in their accounts are computed using a fixed rate per business mile rather than based on actual expenditure. With the approach of Self Assessment, we have been asked if we can give an indication of when Inspectors will not object to such a practice.

Inspectors will not object to taxpayers computing their car expenses using a fixed rate per business mile provided that:

• the rate used does not exceed the appropriate Fixed Profit Car Scheme (FPCS) mileage rate for the car at the time it is used. These rates are published annually by the Inland Revenue (most recently in a Press Release dated 28 November 1995 announcing the rates for 1996-97);
• the annual turnover of the business at the time the car is acquired does not exceed the VAT registration threshold (currently £47,000);
• no other motoring expenses (other than interest on a loan used to purchase the car) are claimed and no capital allowances are claimed on the car (since the FPCS rates already contain an element to allow for depreciation);
• such a basis is applied consistently from year to year so that any change to or from an 'actual' basis (including one required by a change in turnover relative to the VAT registration threshold) takes place only when one car is replaced by another.

The VAT registration threshold is used here purely as a convenient limit whose real value is regularly reviewed; our practice has no application to VAT accounting and does not affect existing VAT rules and practices. We would want to look again at the use of the VAT registration threshold if there is an increase in the threshold substantially in excess of the rate of inflation.

This practice does not apply to taxis and other cars used for hire, nor to vehicles other than cars.

Where taxpayers have existing arrangements for the use of mileage rates other than those set out in this article, Inspectors will expect that on the next change of vehicle, these arrangements are replaced either by claims to actual expenses or (where the conditions in this article are satisfied) by claims in accordance with the practice set out in this article.

Taxpayers are reminded that whatever their business and however they work out their motoring expenses, they are required to keep adequate records to back up their tax return. There is more about what records the self-employed need to keep in our booklet SA-BK3 'Self Assessment: A guide to keeping records for the self-employed'.

interpretations

CAPITAL GAINS TAX:
COMPENSATION PAYABLE TO AGRICULTURAL
AND BUSINESS TENANTS

This article sets out our current views on the capital gains tax treatment of compensation payable to agricultural tenants under the Agricultural Holdings Act (AHA) 1986 or under the Agricultural Tenancies Act (ATA) 1995, and to business tenants under the Landlord and Tenant Act 1954.

Following Davis v Powell, 51 TC 492, compensation payable under Section 60 AHA 1986 to a tenant who quits his or her holding in consequence of a notice to quit is not chargeable to capital gains tax. We have however previously taken the view that where a tenant did not serve out the period of notice, following the receipt of a notice to quit, and instead entered into a surrender agreement with the landlord, then the surrender agreement broke the chain of causation, so that the tenant was not quitting in consequence of the notice to quit, but in consequence of the surrender agreement. It was our view that as a result, any payment made by the landlord was not statutory compensation payable under Section 60 AHA 1986 and that the whole of any such payment was therefore chargeable to capital gains tax.

This point was tested before the Special Commissioners in two appeals heard in 1995, Davis v Henderson, SpC 46, and Pritchard v Purves, SpC 47. In both cases a notice to quit had been issued by the landlord under Section 25 AHA 1986 and subsequently, the tenants quit their holdings before the expiry of the period of notice in return for payments made by their landlords under a surrender agreement. The Special Commissioners held that in both cases the tenants had quit their holdings in consequence of the notice to quit and that part or all of the payments made by the landlords in each case was accordingly statutory compensation payable under Section 60 AHA 1986 and not chargeable to capital gains tax.

We have now decided not to appeal against these decisions. In future we will accept that where a tenant receives a genuine notice to quit issued by the landlord under Section 25 AHA 1986 and then enters into a surrender agreement, any of the payments made by the landlord under the terms of the surrender agreement which relate to compensation payable under Section 60 AHA 1986 will not be chargeable to capital gains tax. This does not mean that all of the payments made under a surrender agreement in these circumstances will be exempt from capital gains tax, but only the amount that represents the statutory compensation payable. We will continue to seek to tax any amount that is not genuine statutory compensation. An example is where the notice to quit was issued after negotiations for a surrender had already begun and where the notice to quit was not the real cause of the termination of the tenancy. In such a case the whole of the surrender payment would be chargeable.

We also accept that the decision in Davis v Powell applies to compensation received for tenants' improvements under Section 64 AHA 1986 or under Section 16 ATA 1995 and that such compensation is exempt from capital gains tax.

Following the Special Commissioners' decisions above, we have also reviewed our approach to compensation received by business tenants under Section 37 Landlord and Tenant Act 1954. We will now accept that a surrender of the tenancy before it comes to an end does not prevent a tenant from being entitled to such compensation if the grounds for entitlement are otherwise met.

[Section 60 AHA 1986, Section 16 ATA 1995 and Section 37
Landlord and Tennant Act 1954.
Davis v Powell, 51 TC 492
Davis v Henderson, SpC 46
Pritchard v Purves, SpC 47.]

! This Article Is No Longer Current (Deleted Index 1999)

CORPORATION TAX:
FOREIGN INCOME DIVIDENDS --
SECTION 246 A-Y ICTA 1988

A UK company might want to elect for a dividend it is to pay to be a foreign income dividend so that the dividend obtains the special treatment in Sections 246 A to Y of the Income and Corporation Taxes Act (ICTA) 1988. The company might want to pay the dividend on some of the shares in a currency other than sterling.

For example; if the company had shares held in the form of American Depositary Receipts, it might declare a dividend in sterling but make arrangements to pay the same dividend in US dollars in respect of those shares. Under such arrangements, the amount of the dividend paid in US dollars might be fixed by reference to the exchange rate between sterling and the dollar on the day the dividend was declared.

Section 246A(3) states, amongst other things, that an election may not be made where there are arrangements for the shareholder to choose the form in which dividends are to be paid. We do not think arrangements of the kind described in the above example come within the scope of Section 246A(3).

Certain other provisions also depend on whether dividends are paid on the same terms. We do not think that arrangements of the kind described in the above example involve payment of the dividend on different terms even where there was a movement in the exchange rate between the time the dividend was declared and the time it was paid.

[Sections 246 A-Y ICTA 1988]

(No longer relevant)
TRANSITION TO PAY AND FILE:
INTEREST ON REPAYMENTS RESULTING
FROM RELIEF CARRY-BACKS

The Pay and File legislation changes the regime for interest added to repayments of corporation tax. Repayments of tax overpaid for accounting periods ending after 30 September 1993 attract repayment interest under Section 826 Income and Corporation Taxes Act (ICTA) 1988. This replaces the supplement regime in Section 825 ICTA 1988 which applies to repayments of tax overpaid for earlier accounting periods.

While the rate of interest under Section 826 ICTA 1988 is lower in relation to base rates than the rate of supplement under Section 825 ICTA 1988, it is usually calculated from the tax due date -- a year before supplement would normally become available. But both Sections contain rules restricting the interest or supplement available where the repayment arises because of a carry-back of surplus ACT from any later period, or of trade losses from a period ending more than 12 months later.

We still receive queries about the effects of this legislation in transitional cases, where a trade loss or surplus of ACT in an accounting period ending after 30 September 1993 is relieved by carry-back to an accounting period ending on or before that date.

SECTION 825 OR SECTION 826?

Sections 825 and 826 are mutually exclusive.

• Repayments of tax paid for accounting periods ending after 30 September 1993 cannot attract supplement because of the words of Section 826(8).
• Repayments of tax paid for accounting periods ending on or before 30 September 1993 cannot attract interest under Section 826 because of the words of Section 826(1). They can still attract supplement, though.

The fact that a repayment results from a relief carry-back is not relevant in deciding whether it is Section 825 or Section 826 which applies.

The following example illustrates the point:

Example

• Surplus ACT paid for the year ended 31/12/94 is carried back under Section 239(3) ICTA 1988 to the year ended 31/12/92.
• This gives rise to a repayment of tax paid for the year ended 31/12/92.
• No repayment interest can be due as Section 826 does not apply to repayments of tax paid for periods ending before 1/10/93.
• Repayment supplement will be due if the repayment is made after 1/10/96 -- 12 months after the "material date" (Section 825(2)). The "material date" is 1/10/95 -- the tax due date of the accounting period for which the surplus ACT arose, following Section 825(4)(a).
• Section 825(4)(a) treats the repayment as if it were a repayment of tax paid for the year to 31/12/94, but only for the purposes of calculating the supplement due under Section 825. It does not bring Section 826 back into play, as Section 825(4) begins with the words "For the purposes of this section...".

It would make no difference to the example if the carry-back were of a trade loss under Section 393A(1)(b) ICTA 1988 rather than surplus ACT, except that Section 825(4)(c)(ii) would replace Section 825(4)(a).

[Sections 825 and 826 ICTA 1988]

ENTERPRISE INVESTMENT SCHEME:
RAISING MONEY FOR QUALIFYING
BUSINESS ACTIVITIES

The provisions of the Enterprise Investment Scheme apply where a company issues shares in order to raise money for the purpose of a qualifying business activity and the money raised is employed for that purpose. The phrase "qualifying business activity" is defined in Section 289(2) Income and Corporation Taxes Act (ICTA) 1988; briefly, it covers carrying on a trade (or preparing to do so), carrying on research and development and carrying on oil exploration.

Where a company raises money partly for the activity of preparing to carry on a trade and partly for the subsequent carrying on of that trade, we regard that as a single qualifying business activity. But a company may wish to issue shares to raise money for more than one qualifying business activity -- for example, for two trades carried on by different subsidiaries, or for a trade carried on by one subsidiary and research and development carried on by another. We accept that the rules allow this. The purpose of this article is to explain the practical consequences of it.

When providing a statement under Section 306(3) ICTA 1988 on form EIS 1, a company is required to state the nature of the qualifying business activity for which the money has been raised. If it has raised money for more than one such activity it should report that fact. The company will then have to satisfy the rule in Section 289(1)(c) and (3) ICTA 1988, about using the money within a certain time, separately in respect of each part of the sum raised.

Reflecting Section 289A(6) and (7) ICTA 1988, form EIS 1 requires the company to declare that the activity for which the money was raised has been carried on for four months. Where this four month point is reached at two different dates -- as will happen, for example, if part of the money is raised for an existing trade and part for a trade not yet commenced - our view is that form EIS 1 cannot be submitted unless the second date has been reached. Similarly, the terminal date for making the statement, provided by Section 306(3A) ICTA 1988, will likewise be postponed.

In addition, the duration of the company's relevant period, which is governed by Section 312(1A)(b) ICTA 1988, depends on the nature of the qualifying business activity and, where there are two different dates, our view is that the relevant period lasts until the second date has been reached.

Of course, these complications do not arise if the funds for the two activities are raised separately. This can be achieved simply by issuing the shares on two different dates.

It is sometimes suggested that a company can be both "preparing to carry on a qualifying trade" and "carrying on research and development from which it is intended that a qualifying trade will be derived"; in other words, its activity falls within both (a) and (b) of Section 289(2) ICTA 1988. In our view, however, this is unlikely. A company is not normally in a position to prepare to carry on a trade until its invention has reached the stage where it can be patented.

Not all research and development falls within (b) of Section 289(2) ICTA 1988; a company which is already trading and which raises money for research and development with a view to inventing something which will extend its trade can only come within (a) of Section 289(2) ICTA 1988, because despite engaging in research and development, it does not intend to derive a new trade from that activity.

In the rare case where a qualifying business activity does come within both (a) and (b) (or (a) and (c)) of Section 289(2) ICTA 1988, we are content for the company to choose, by means of reporting the nature of the activity on form EIS 1, how it wishes that activity to be regarded. In making that choice, the company will need to bear in mind the consequences for the earliest date for sending in form EIS 1, the time limit for using the money raised, and the duration of the relevant period.

(All references in this article to provisions in ICTA 1988 are to the versions of them which apply in respect of shares issued on or after 1st January 1994.)

[Sections 289 and 312 ICTA 1988]

! This Article Is No Longer Current (Deleted Index 1997)

FOREIGN LOAN INTEREST AND TAX
CREDIT RELIEF -- SECTION 798 ICTA 1988

Section 798 provides specific rules limiting the amount of tax credit relief which may be claimed by financial traders whose interest income has already been taxed by an overseas tax authority. It makes it clear that the credit is limited to the UK tax attributable to the net income after deducting the lender's financial expenditure in relation to the loan.

The purpose of this article is to clarify the scope, rather than discuss the detailed provisions of Section 798.

The Section will apply wherever interest:

• arises from a loan made to a non-UK resident ("foreign loan interest"), and
• falls to be treated as a Case I receipt of any person ("the lender");

and wherever foreign tax:

• is chargeable on the interest, and
• the lender is entitled to claim tax credit relief for it.

It has been suggested that the Section applies only where the recipient of the interest actually made the loan. This is not so. The Section applies in all cases where "foreign loan interest" is trading income. It will, for example, apply to interest received;

• by a securities dealer on overseas debt securities purchased on the secondary market, and
• by a financial trader to whom a loan has been assigned.

"Foreign loan interest" in principle includes manufactured interest on overseas debt securities ("manufactured overseas dividends") arising as a result of a transfer of such securities, where the "manufactured overseas dividends" are in respect of "foreign loan interest" to which Section 798 would have applied. This would include transfers by way of a "repo" (a sale and repurchase agreement), a stock loan or an outright sale. In such cases, the lender's financial expenditure to be included by virtue of Section 798 (7) will be that relating to the provision or purchase of the securities which have been transferred.

The amount of the financial expenditure to be deducted from the interest in calculating the amount of tax credit relief will depend on the facts and circumstances of the particular case and may be the subject of negotiation between the lender and its Inspector (having regard to the regulations in Statutory Instruments 88 1988).

[Section 798 ICTA 1988]

(Superseded by BIM45815)

SCHEDULE D CASES I & II:
INCIDENTAL COSTS OF LOAN FINANCE:
TIMING OF DEDUCTIONS -- SECTION 77 ICTA 1988

Section 77 Income and Corporation Taxes Act (ICTA) 1988 provides that in computing profits assessable under Case I or II of Schedule D, there may be deducted, subject to certain conditions, the incidental costs of business borrowing. We have been asked about the timing of the tax deduction for these costs.

In our view, Section 77 is silent on the timing of any deduction (apart from preventing any deduction for the costs of certain convertible loans or loan stock until three years after the date of the loan or issue). The Section merely operates to ensure that incidental costs (as defined in the Section) are not disallowed as capital expenditure (as would often have been the case before what is now Section 77 was introduced in 1980).

It follows that a deduction for incidental costs is due at the same time as any other deduction given in computing Case I or II profits. In matters of timing, recent case-law, for example Threlfall v Jones 66 TC 77, has emphasised the importance of the accountancy treatment. In this context the effect will be that the treatment of incidental costs in the taxpayer's accounts must be followed for tax purposes, provided that the accounts are correctly drawn up in accordance with applicable UK accounting standards.

For example, where Financial Reporting Standard No 4 (Capital instruments) requires an arrangement fee to be factored into the cost of borrowing and therefore charged against profits over the life of a loan, the tax deduction under Section 77 would be due in the same way.

If the 1996 Finance Bill currently proceeding through Parliament is enacted in its present form then Section 77 will be superseded, for companies only, by the new provisions on "loan relationships". These will apply for accounting periods ending after 31 March 1996. There will be a Tax Bulletin article about the new rules for incidental costs of loan finance after Royal Assent.

[Section 77 ICTA 1988
Threlfall v Jones 66 TC 77]

miscellaneous

TAXATION OF FRENCH NATIONAL SERVICE
VOLUNTEERS IN THE UK

It has been suggested that French nationals working in the UK for subsidiaries of French-owned companies (Volontaires du Service National en Entreprise) are exempt from income tax. This is not the case.

Where French nationals choose to work in the UK for French companies as an alternative to national service with the French armed forces, they render their services to the company concerned and not to the French government.

Consequently these individuals are not entitled to claim exemption from United Kingdom tax under the governmental services Article (Article 19) of the UK/France Double Taxation Agreement, nor are they entitled to exemption from tax under Section 323 Income and Corporation Taxes Act 1988. Inland Revenue practice has not changed.

! This Article Is No Longer Current (Deleted Index 1999)

TAX TREATY NETWORK
ANNUAL UPDATE

Double taxation agreements (bilateral tax treaties) form a major tool of international tax policy. Where competing domestic tax systems meet, questions of jurisdiction can arise -- with resultant risks of double taxation. We remedy such problems with double taxation agreements, to divide the taxing rights that each treaty partner claims under its domestic law over the same income or gains. These agreements provide additional protection for taxpayers by specific measures to counter discrimination in tax treatment. More generally, they ensure certainty of treatment and, as far as possible, reduce compliance burdens.

In addition to overlapping claims, there may be the potential for avoidance or evasion. Double taxation agreements also serve an Exchequer protection role by including provisions to combat avoidance and evasion -- not least, measures providing for the exchange of information between Revenue authorities.

The UK has the world's largest network of double taxation agreements. The Government is committed to the expansion and modernisation of this network. In this way we endeavour to assist UK companies competing abroad, by removing impediments to cross border economic activity.

Details of the UK tax treaty network are given in part 1 of the table at the end of this article, with a list of treaties which are currently under negotiation in part 2. During the past year, negotiations have resulted in new comprehensive agreements entering into force with Azerbaijan, Bolivia, Ghana and Malta, agreement on a protocol with the Republic of Ireland, and an Exchange of Notes with Spain. Also, recently, new agreements with Argentina and Venezuela have been signed at Ministerial level.

Priorities for new double taxation agreements and desirable changes to existing double taxation agreements are arrived at after close consultation with business and representative bodies, the Department of Trade and Industry, and the Foreign and Commonwealth Office. Other representations are also welcome and should be addressed to:

Gill Meacock
Inland Revenue
International Division
Room 314, Strand Bridge House
138-142 Strand
London
WC2R 1HH

(Tel: 020 7438 6333)

Questions about a particular double taxation agreement and its effect on a taxpayer's own affairs should be addressed to the local Inland Revenue office responsible for that taxpayer.

Estates, inheritances and gifts are regulated by separate treaties. In the past year, a comprehensive agreement with Switzerland has entered into force, and a protocol has recently been signed with the Netherlands updating and amending the existing agreement.

Representations for new or revised agreements for taxes on estates, inheritances and gifts should be addressed to:

David McDonald
Inland Revenue
Capital and Valuation Division
Room 309
22 Kingsway
London
WC2R 1LB

(Tel: 020 7438 7741)

Questions regarding existing agreements on estates, inheritances and gifts should be addressed to:

Mark Czarnecki
Inland Revenue
Capital Taxes Office
Ferrers House
P.O. Box 38
Castle Meadow Road
Nottingham
NG2 1BB

(Tel: 0115 974 2416)

The United Kingdom's World Network of DOUBLE TAXATION AGREEMENTS (As at 31 March 1996)

1. AGREEMENTS IN FORCE

(a) Comprehensive agreements covering taxes on income, profits and capital gains:

ANTIGUA & BARBUDA      HUNGARY                   PHILIPPINES
AUSTRALIA              ICELAND                   POLAND
AUSTRIA                INDIA                     PORTUGAL
AZERBAIJAN             INDONESIA                 ROMANIA
BANGLADESH             IRELAND, REPUBLIC OF      RUSSIAN FEDERATION (1)
BARBADOS               ISLE OF MAN               ST KITTS & NEVIS
BELARUS (1)            ISRAEL                    SIERRA LEONE
BELGIUM                ITALY                     SINGAPORE
BELIZE                 IVORY COAST               SLOVAK REPUBLIC
BOLIVIA                JAMAICA                   SLOVENIA (2)
BOTSWANA               JAPAN                     SOLOMON ISLANDS
BRUNEI                 JERSEY                    SOUTH AFRICA
BULGARIA               KENYA                     SPAIN
CANADA                 KIRIBATI                  SRI LANKA
CHINA                  KOREA, REPUBLIC OF        SUDAN
CROATIA (2)            LESOTHO                   SWAZILAND
CYPRUS                 LUXEMBOURG                SWEDEN
CZECH REPUBLIC         MACEDONIA (2)             SWITZERLAND
DENMARK                MALAWI                    THAILAND
EGYPT                  MALAYSIA                  TRINIDAD & TOBAGO
ESTONIA                MALTA                     TUNISIA
FALKLAND ISLANDS       MAURITIUS                 TURKEY
FAROE ISLANDS          MEXICO                    TUVALU
FIJI                   MONTSERRAT                UGANDA
FINLAND                MOROCCO                   UKRAINE
FRANCE                 MYANMAR (BURMA)           UNITED STATES OF AMERICA
GAMBIA                 NAMIBIA                   UZBEKISTAN
GERMANY                NETHERLANDS               VIETNAM
GHANA                  NEW ZEALAND               YUGOSLAVIA (2)
GREECE                 NIGERIA                   ZAMBIA
GRENADA                NORWAY                    ZIMBABWE
GUERNSEY               PAKISTAN
GUYANA                 PAPUA NEW GUINEA

(1) The UK's agreement with the Soviet Union is to be regarded as in force between the UK and those former Soviet Republics marked. For former Soviet Republics not listed, the UK will continue to apply the provisions of the old

UK/USSR agreement on the basis that it is still in force (until such time as new agreements take effect with particular countries). In such cases, the stance of the foreign authorities should be clarified with them.

(2) The UK's agreement with Yugoslavia is to be regarded as in force between the UK and Croatia, Macedonia and Slovenia. The position as at March 1996 with regard to other parts of former Yugoslavia was undetermined.

(b) Limited agreements, covering taxes on income from international transport

ALGERIA (Air Transport)                  JORDAN (Shipping and Air Transport)
ARGENTINA (Shipping and Air Transport)   KUWAIT (Air Transport)
BELARUS (Air Transport) (1)              LEBANON(Shipping and Air Transport)
BRAZIL (Shipping and Air Transport)      RUSSIAN FEDERATION (Air Transport) (1)
CAMEROON (Air Transport)                 SAUDI ARABIA (Air Transport)
CHINA (Air Transport) (1)                VENEZUELA (Shipping and Air Transport)
ETHIOPIA (Air Transport)                 ZAIRE (Shipping and Air Transport)
IRAN (Air Transport)

(1) Air Transport agreements which were not terminated by the later Comprehensive agreements and remain in force alongside them. The agreement with the former Soviet Union is to be regarded as in force with those countries marked. The position with former Soviet Republics not listed -- apart from those with which new comprehensive agreements have been reached -- is less clear, but the UK will in all cases apply the provisions of the old agreement on the basis that it is still in force (until such time as new agreements, comprehensive or otherwise, take effect with particular countries).

(c) Agreements covering taxes on estates, gifts and inheritances:

FRANCE                  NETHERLANDS       SWITZERLAND
INDIA (1)               PAKISTAN (1)      UNITED STATES OF AMERICA
REPUBLIC OF IRELAND     SOUTH AFRICA
ITALY                   SWEDEN

(1) Agreements of limited effect following the abolition of Estate Duty in each of the Contracting States.

Copies of individual agreements in force can be obtained from HMSO, quoting the Statutory Instrument number of the agreement (listed under "Double Taxation Relief: List of Orders" in the Statutory Regulations section of the Taxes Acts). Volumes containing all the UK's agreements are also available from specialist financial publishing houses.

2. AGREEMENTS CONCLUDED OR UNDER NEGOTIATION BUT NOT YET IN FORCE (As at 31 March 1996)

(a) Agreements covering taxes on income, profits and capital gains:

Comprehensive agreements*ARGENTINA                     NAMIBIA
*BELARUS                         NORWAY
BRAZIL                          *RUSSIAN FEDERATION
CANADA                           SINGAPORE
COLOMBIAVENEZUELAECUADOR
FRANCE                           Protocols amending existing agreements
GERMANY
*KAZAKHSTAN                     CHINA
KOREA, REPUBLIC OF               DENMARK
LATVIA                          FINLAND
LESOTHO                          IRELAND, REPUBLIC OF
LITHUANIA                       JERSEY (Supplementary arrangement)
MALAYSIA                         KAZAKHSTAN
MONGOLIA                        NETHERLANDS

(b) Limited agreements, covering taxes on income from international transport:

BAHRAIN                          QATAR OMAN                             UNITED ARAB EMIRATES

(c) Agreements covering taxes on estates, gifts and inheritances:

GERMANY                          *NETHERLANDS (protocol)

* Signed but not in force.

Bold entries are the first agreements of their type that the UK has negotiated with this partner

! This Article Is No Longer Current (Deleted Index 2002)

GROUP INCOME ELECTIONS:
SECTION 247(4) ICTA 1988

The changes to the treatment of interest provided for in the Finance Bill include providing that elections under Section 247(4) can cover payments of interest to which Chapter II of Part IV of the Finance Bill will apply.

Companies will no doubt want or will have occasion to make new elections at some stage. In the meantime, a valid Section 247(4) election which refers only to charges, will be treated as extending to payments of interest in relation to which a debit falls to be brought into account for the purposes of what will be Chapter II of Part IV of the Finance Act 1996. This is, of course, subject to the relevant parts of the Finance Bill being enacted without any material alteration.

! This Article Is No Longer Current (Deleted Index 1998)

INHERITANCE TAX AND PENALTIES

We have been asked to explain what circumstances can give rise to penalties under the Inheritance Tax (IHT) legislation and how we deal with such cases. A new leaflet IHT 13 "Inheritance Tax and Penalties" has been published by the Capital Taxes Office (CTO). This sets out the statutory provisions which apply and outlines what the CTO expects of personal representatives, trustees, etc. It also gives details of the mitigating factors which usually result in the amount strictly due being substantially discounted.

Copies of the leaflet may be obtained from any of the following offices:

Capital Taxes Office
Inland Revenue
PO Box 38
Ferrers House
Castle Meadow Road
Nottingham
NG2 1BB

Telephone: 0115 974 2400

Capital Taxes Office
Inland Revenue
Dorchester House
52-58 Great Victoria Street
Belfast
BT2 7QL

Telephone: 028 9031 5556

Capital Taxes Office
Inland Revenue
Mulberry House
16 Picardy Place
Edinburgh
EH1 3NB

Telephone: 0131 556 8511

! This Article Is No Longer Current (Deleted Index 1997)

CORPORATION TAX:
NEW RETURN FORM

The Finance Bill contains new provisions for the taxation of companies' profits and losses on loan relationships. There are also amendments to provisions in Finance Acts 1993 and 1994 for the taxation of foreign exchange fluctuations and profits and losses on certain financial instruments. The new legislation is effective for accounting periods ended on or after 1 April 1996.

We are introducing a new return form to take account of these provisions. A Press Release announcing the new form will be issued shortly.

The new return form will be issued automatically to companies after September 1996 but if any company needs to complete the new form before then, the company or its agent should contact their local tax office.

The previous version of the return form remains valid for accounting periods ended on or before 31 March 1996 and for later accounting periods where non-trade profits and losses covered by the legislation do not arise.

Companies will need to complete the new version only if they have:

• profits or losses arising from loan relationships that were not held for the purposes of a trade carried on by the company;
• non-trade profits arising from exchange fluctuations or certain financial instruments;
• the carry forward from an earlier accounting period (or carry-back from a later one) of a non-trade deficit arising from a loan relationship, an exchange fluctuation or from certain financial instruments.

Profits and deficits arising from loan relationships for trading purposes are accounted for in arriving at the profits or losses of the trade. Companies do not need the new form in these circumstances.

Until the new return form is issued automatically, a leaflet will accompany every return form issued to companies. This leaflet contains the information given above.

INLAND REVENUE STATEMENTS OF PRACTICE AND EXTRA-STATUTORY CONCESSIONS ISSUED BETWEEN 1 FEBRUARY 1996 AND 31 MARCH 1996.

EXTRA STATUTORY CONCESSIONS

Number    Title                                	Date of Issue
A94        Profits and losses of theatre backers       8/2/96
(Angels)
A19        Giving up tax where there are Revenue       11/3/96
delays in using information                 (revised)

STATEMENT OF PRACTICE

Number    Title                                 Date of Issue
1/96       Notification of chargeability to income     1/2/96
tax and capital gains tax years 1995-96
onwards
2/96       Pooled cars: Incidental private use         29/3/96

You can get copies of SPs and ESCs from Christine Jordan of the Public Enquiry Room, Somerset House.
Telephone: 020 7438 7772.

CONTENT

The content of Tax Bulletin gives the views of our technical specialists on particular issues. The information published is reported because it may be of interest to tax practitioners. Publication will be six times a year, and include a cumulative index on an annual basis.

• You can expect that interpretations of the law contained in the Bulletin will normally be applied in relevant cases, but this is subject to a number of qualifications.
• Particular cases may turn on their own facts, or context, and because every possible situation cannot be covered there may be circumstances in which the interpretation given here will not apply.
• There may also be circumstances in which the Board would find it necessary to argue for a different interpretation in appeal proceedings.
• "Revenue decisions" report conclusions that were reached on the facts of individual cases, but do not necessarily include all the detailed facts which may have been relevant to the decision. They provide an indication of the approach the Revenue has adopted in the past, but have not been drafted as generally applicable statements of the Revenue's position. It cannot be assumed therefore, that interpretations of the law contained or implicit in these decisions will necessarily be applied in other cases.
• The Bulletin does not replace formal Statements of Practice.
• The Board's view of the law may change in the future. Readers will be notified of any changes in future editions.

Nothing in this Bulletin affects a taxpayer's right of appeal on any point.

Letters on any article appearing in Tax Bulletin should be sent to the Editor, David Richardson, Room 402, 22 Kingsway, London WC2B 6NR. We are sorry though that neither he nor our contributors will normally be able to enter into correspondence about Tax Bulletin or its contents.

SUBSCRIPTION

The subscription for 1996 is £20. If you would like to subscribe to Tax Bulletin please send your name and address together with your cheque to Inland Revenue, Finance Division, Barrington Road, Worthing, West Sussex BN12 4XH. Cheques should be crossed and made payable to "Inland Revenue".

If you would like further information regarding Tax Bulletin please contact Ms Nahid Shariff, Room 435, 22 Kingsway, London WC2B 6NR. Telephone: 020 7438 7842.

COPYRIGHT

Tax Bulletin is covered by Crown Copyright. There is no objection to firms copying the Bulletin for their own use. Anyone wishing to republish Tax Bulletin or extracts more widely should write for permission to Ms Nahid Shariff, Room 435, 22 Kingsway, London WC2B 6NR.

TAX BULLETIN PROVIDED IN WEB READY FORMAT COURTESY OF TAX ANALYSTS AND TAXBASE