Tax Bulletin issue 35

This article explains how the new rules on capital allowances for finance lessors in Sections 44 to 47 Finance (No2) Act 1997 ("F(No2)A 1997") are intended to operate. We would like to thank the Finance and Leasing Association, who were consulted on the text of the article, for the many helpful comments they made and from which the article has greatly benefited.

Introduction

These provisions were introduced as part of a package of measures to stop tax leakage. They apply where expenditure is incurred on the provision of machinery or plant for leasing out under a finance lease. The changes affect the tax treatment of finance lessors, which are generally members of financial groups dealt with in the Large Business Offices. They can also affect the treatment of the vendor on a sale and finance leaseback, although this is not likely to happen in practice as the leasing arrangements will take account of the new rules.

There are three main changes. First, the expenditure that qualifies for capital allowances is time apportioned in the first year. Together with changes made to group relief, this counters the use of finance leases to accelerate the benefit of capital allowances on the leased assets. Second, where the asset has been sold and leased back, the amount on which allowances are given is limited to the notional written down value to the vendor. The disposal value to the vendor is also limited to the same amount. Third, where the asset has been sold and leased back on defeased terms, no allowances are given to the lessor. The latter two changes counter arrangements to transfer the benefit of unused allowances to a finance lessor.

Finance lease

The new rules apply where expenditure is incurred on the provision of machinery and plant for leasing out under a finance lease. The term "finance lease" is defined for these purposes in Section 82A Capital Allowances Act 1990 ("CAA 1990"), which is added by Section 47 F(No2)A 1997. The definition is intended to have the same meaning in practice as that used in Schedule 12 FA 1997, although the wording is different as some of the complexities that appear in Schedule 12 do not arise here.

There has been some confusion over the reference in Section 82A(1)(b) to UK companies. The reference is made in order to apply the normal accounting practice applicable to a company incorporated in the UK, that is Generally Accepted Accounting Practice in the United Kingdom ("UK GAAP"), to the accounts of the lessor and persons connected with the lessor. It does not impose any requirement that either the lessor or any of the persons connected with the lessor is a company incorporated in the UK.

What the definition in Section 82A means is that a "finance lease" is an arrangement or arrangements which under UK GAAP would fall to be treated as a finance lease or as a loan in the accounts or consolidated accounts of the lessor or any person connected with the lessor.

Starting date

The new rules apply to expenditure incurred on or after 2 July 1997 other than expenditure incurred before
2 July 1998 "in pursuance of a contract entered into before 2 July 1997". This form of wording has been used in other similar provisions and, following the House of Lords judgement in CIR v Mobil North Sea Ltd (60 TC 31), in this context means expenditure to which the claimant was contractually committed before 2 July 1997.

Writing-down allowances for finance lessors

Sections 25(5A), (5B) and (5C) CAA 1990 were introduced in Section 44 F(No2)A 1997 to bring the period over which capital allowances are given on machinery or plant leased out under a finance lease into line with the period over which rents accrue under the lease by removing the acceleration of the allowances that had previously occurred at the start of the lease.

The purpose of Section 25(5A) is to restrict the allowances for the chargeable period in which the expenditure is incurred rateably from the date it is incurred. For instance if expenditure is incurred three months before the end of the period, the writing-down allowance is restricted to 3/12ths of the annual rate.

Section 25(5A) works by limiting the amount that can be included in qualifying expenditure, and thus added to the pool, for the chargeable period in which the expenditure is incurred to:

(the expenditure) x (the length of the remainder of the chargeable period from when the expenditure is incurred) / (the length of the chargeable period).

As the rate at which writing-down allowances are given is reduced or increased in proportion to the length of the chargeable period (Section 24(2)(a)(ii) CAA 1990), the effect is to limit the allowances given for the chargeable period in which the expenditure is incurred rateably to the length of the remainder of the chargeable period from when the expenditure is incurred.

Example

Expenditure £50,000, incurred 50 days before the end of a chargeable period of the finance lessor 300 days long, rate of writing down allowance 25%

Qualifying expenditure is £50,000 x 50/300

Rate of allowance is 25% x 300/365

Allowance is £50,000 x 50/300 x 25% x 300/365 = £50,000 x 25% x 50/365

The effect is exactly the same if the chargeable period is more than 12 months long, for instance if the lessor in the above example is a non-corporate and the period is 400 days long, the allowance is

£50,000 x 50/400 x 25% x 400/365 = £50,000 x 25% x 50/365.

Where expenditure on the provision of an item of machinery or plant is incurred in instalments on different dates, each instalment is apportioned separately.

Section 25(5C) allows the balance of expenditure not added to the pool to be carried forward and added to the pool for the next chargeable period.

Where exceptionally the asset is disposed of by the finance lessor in the same chargeable period as that in which the expenditure is incurred, Section 25(5B) allows the expenditure and the disposal value to be brought into the pool for that chargeable period, so that allowances are given based on the actual depreciation suffered by the finance lessor.

Interaction with the belonging condition for capital allowances on machinery and plant

Expenditure on machinery or plant does not qualify for capital allowances, and cannot therefore be included in qualifying expenditure, until the chargeable period in which the asset first belongs to the claimant (Section 24(1)(b) CAA 1990). If the machinery or plant does not belong to the lessor until after the chargeable period in which the expenditure is incurred, no apportionment is therefore required. The whole of the expenditure is included in the qualifying expenditure for the chargeable period in which the machinery and plant first belongs to the lessor.

This can happen where a fixture is let under an equipment lease if the lessee does not start to trade until after the end of the chargeable period in which the expenditure is incurred, as the equipment is treated as not belonging to the lessor until the lessee starts to trade (Section 53(1A) CAA 1990). However, if the equipment lessee starts to trade either earlier or later in the chargeable period in which the expenditure is incurred, the expenditure is apportioned from the date that the expenditure is incurred and not from the date that the lessee starts to trade.

Expensive cars

Section 34 CAA 1990 restricts the writing down allowances that can be claimed on a car costing more than £12,000 to £3,000 a year. Where the car is leased out under a finance lease, the qualifying expenditure will be restricted under Section 25(5A) for the chargeable period in which the expenditure is incurred. The writing down allowance is calculated on the restricted qualifying expenditure at 25% and then restricted to £3,000.

Example

Two cars, each costing £40,000, are bought 6 and 3 months before the end of a 12 month chargeable period.

Car bought 6 months before end of chargeable period

Qualifying expenditure for that period is £40,000 x 6/12 = £20,000.

Writing down allowance (£20,000 x 25% = £5,000) is restricted under Section 34 CAA 1990 to £3,000.

Car bought 3 months before end of chargeable period

Qualifying expenditure for that period is £40,000 x 3/12 = £10,000.

Writing down allowance is £10,000 x 25% = £2,500.

There is no restriction for that period under Section 34 CAA 1990.

Computation

The apportionment under Section 25(5A) CAA 1990 should be made using the number of whole days in each period. The day on which the expenditure is incurred is included in the numerator.

Where a finance lessor has difficulty in complying with the requirement to apportion by reference to the actual numbers of days for expenditure incurred immediately after the introduction of the new rules, the lessor may by agreement with the local Inspector use a simplified form of calculation for expenditure up to the end of the year 2001 provided this will give broadly the correct result, for instance by batching expenditure on small ticket leases weekly or monthly and apportioning using the mean date for the batch.

The use of computations involving averaging is only intended as a transitional measure to give lessors time to adapt their systems to the new rules. For expenditure on or after 1 January 2002, lessors should adopt a basis which ensures that the amount included in the qualifying expenditure does not exceed the permitted amount, for instance by apportioning expenditure separately for each day or by batching expenditure weekly or monthly and apportioning using the end date for the batch.

Hire purchase by finance lessors

Where a trader buys machinery or plant under a contract which provides that he or she shall or may become the owner of the asset on performance of the contract:

the belonging condition is treated as satisfied when the trader becomes entitled to the benefit of the contract, so that expenditure after that qualifies for capital allowances as soon as it is incurred (Section 60(1)(a) CAA 1990);
when the asset is brought into use for the purposes of the trade, any remaining expenditure to be incurred under the contract is treated as incurred, and therefore qualifies for capital allowances, at that time (Section 60(1)(b) CAA 1990).

Section 45 F(No2)A 1997 disapplies Section 60(1)(b) for expenditure on the provision of machinery or plant for leasing under a finance lease. This means that where a finance lessor buys an asset for leasing on hire purchase, expenditure does not qualify for capital allowances until it is actually incurred, as determined under the rules in Section 159 CAA 1990. Where the expenditure on the asset is due in instalments, the apportionment rules in Section 25(5A) CAA 1990 are applied to each instalment separately.

Section 60(2)(b) CAA 1990 ensures that where the benefit of the contract is given up or transferred after the asset has been brought into use, any capital allowances given on expenditure which has not in fact been incurred are clawed back. This rule is also disapplied for finance leases as it is not applicable. Where the finance lessor ceases to be entitled to the benefit of the contract, other than on becoming the owner of the asset, the asset will cease to be treated as belonging to the lessor under Section 60(1)(a) giving rise to a disposal event under Section 24(6)(c)(i) CAA 1990. The disposal value is given by Section 26(1)(f) CAA 1990, or possibly Section 26(1)(c) or (d) depending on the circumstances, and limited to the capital expenditure which the lessor has actually incurred under Section 26(2).

The commencement provisions in Section 45(2) F(No 2)A 1997 are applied before the deeming rule in Section 60(1)(b) CAA 1990. Where the asset is brought into use for the purposes of the trade of the lessor in a chargeable period ending before 2 July 1997, Section 60(1)(b) treats all future expenditure as incurred when the asset is brought into use including expenditure to be incurred on or after 2 July 1998. Where the asset is brought into use for the purposes of the trade of the lessor in a chargeable period ending on or after 2 July 1997, Section 60(1)(b) only applies to expenditure that is actually incurred either before 2 July 1997 or in the 12 months ending 1 July 1998 in pursuance of a contract entered into before 2 July 1997.

Sale and finance leaseback

Section 75 CAA 1990 restricts the capital allowances available to the purchaser where machinery or plant:

(a) is sold between connected persons or

(b) continues to be used for the purposes of a trade carried on by the vendor or

Section 76 CAA 1990 extends (b) to use after the sale for the purposes of a trade carried on by the vendor or by any person connected with the vendor.

Section 46 F(No2)A 1997 modifies the rules in Section 75 and 76 for sale and leaseback (ie transactions within (b) of Sections 75(1), (2) and (3) CAA 1990 as extended by Section 76) where the asset is leased back under a finance lease. It adds a new Section 76A CAA 1990.

There is no requirement for the asset to have been brought into use before it is sold and leased back. Sections 75, 76 and 76A CAA 1990 will apply for instance where an asset purchased new is sold and leased back immediately on delivery without having been brought into use.

Extension to non-traders

Sections 75 and 76 CAA 1990 did not previously apply to the sale and leaseback of an asset used for activities which are neither a trade nor a deemed trade for the purposes of Part II CAA 1990. Section 76A(1) extends the coverage of Section 75, 76 and 76A to the sale and leaseback of an asset used for non-trade purposes where the leaseback is under a finance lease.

Sale and leaseback by novation or new contract

Section 76A CAA 1990 can apply to a sale and leaseback only if the sale and leaseback falls within Section 75 as extended by Section 76.

Section 75 CAA 1990 is widely drawn to cover the different ways in which the entitlement to capital allowances can be transferred from the vendor to the purchaser. Section 75(1) covers a straightforward sale. Section 75(2) covers a deemed sale under Section 60 CAA 1990. Section 75(3) covers the case where the benefit of a contract under which the asset is deemed to belong to the vendor under Section 60 CAA 1990 is transferred to the purchaser.

Section 75(3) applies where the benefit of a contract to which Section 60 applies is assigned. Some commentators have suggested that "assigns" should be read as a legal term of art that does not include novation and other ways in which the contract is replaced by a new contract. We do not agree. Section 75 is an anti-avoidance provision and should therefore be given a wide reading to cover the kinds of mischief against which it is aimed.

The purpose of Section 75 is to prevent the acceleration or uplift in capital allowances on a sale between connected persons, a sale and leaseback or a sole or main benefit sale. We consider that any transfer of the benefit of a contract to which Section 60 applies that could give rise to an acceleration or uplift in capital allowances may therefore be caught by Section 75(3).

We accept however that Sections 75, 76 and 76A do not apply where the benefit of a contract to which Section 60 applies is transferred to the lessor in a sale and finance leaseback by novation of the contract or replacing it with a new contract in some other way before the asset has been brought into use by the lessee or any person connected with the lessee if:

neither the lessee nor any person connected with the lessee has claimed or will claim capital allowances in respect of the asset, or
the obtaining of an acceleration in the allowances due to the lessee, any person connected with the lessee and the lessor over those that would have been due if the expenditure incurred by the lessee under the Section 60 contract had been incurred by the lessor is not a main object of the leasing arrangements.

Assets with long build times

Where a trader plans to acquire an asset with a long build time financed through a finance lease, Sections 75, 76 and 76A will not apply if the asset is ordered by the lessor initially or if the purchase contract is novated to the lessor before the asset is brought into use for the purposes of the trade and the conditions in the preceding paragraph are satisfied. We would not regard testing of the asset or use for the training of operators before it is accepted from the manufacturer as bringing into use in this context.

Where the asset is built by the trader for use in his or her own trade and sold and leased back before it is brought into use, Sections 75, 76 and 76A will apply unless the trade includes the manufacture of assets of that class and the asset was manufactured in the ordinary course of that trade (Section 76(5) CAA 1990). An item which is not part of the usual stock in trade of the manufacture or which is purpose built for use as a fixed asset of the trade is unlikely to fall within this exclusion. In such a case, a sale to the lessor under a contract within Section 60 CAA 1990 entered into before any expenditure has been incurred by the trader may help to mitigate the effect of Section 76A(2).

Restriction to notional written down value

Section 75 restricts the amount on which allowances can be claimed by the purchaser to the disposal value of the vendor. This prevents the purchaser from claiming allowances on more than the original cost to the vendor as the disposal value is limited to the expenditure on which allowances have been claimed by the vendor. Where the vendor has not claimed capital allowances, Section 76(2) restricts the amount on which allowances can be claimed by the purchaser to the lowest of the current open market value, the original cost to the vendor and the original cost to any person connected to the vendor.

Where the asset is sold and leased back under a finance lease, Section 76A(2) limits the disposal value, if any, to be brought in by the vendor and the amount on which allowances can be claimed by the purchaser to the lowest of the current open market value, the notional written down value of the cost to the vendor and the notional written down value of the cost to any person connected with the seller.

This rule limits the allowances which are given overall to the original cost to the vendor. It also prevents any allowances to which the vendor would have been entitled before the sale from being transferred to the lessor. The limit on the allowances that can be transferred to the lessor does not depend on whether allowances could or have been claimed by the vendor. It is calculated by deeming the vendor to be entitled to capital allowances on the expenditure that the vendor incurred.

The notional written down value is calculated by writing down the cost by the allowances which would have been due if that expenditure had been incurred for the purposes of a trade within the charge to tax. If allowances were actually due on the expenditure, these allowances are calculated using the actual chargeable periods of the vendor. This means that if the expenditure was incurred before the start of the actual trade of the vendor, it is written down from the start of that trade under Section 83(2). If it was incurred after the start of the actual trade, it is written down from the start of the chargeable period in which it was incurred (not by reference to a notional chargeable period starting when it was incurred). If allowances were not actually due to the vendor on the expenditure, these allowances are calculated by reference to the chargeable periods of a deemed trade commencing when the expenditure was incurred. In either case, the expenditure is written down for each chargeable period that ends after the expenditure was incurred and before the sale to the lessor.

If the sale to the lessor takes place in the same chargeable period of the lessee as that in which the lessee incurred the expenditure on the provision of the asset, the notional written down value is equal to the cost to the lessee.

As a broad rule of thumb, the cost to the vendor is written down at 25% (or 6% if the long life asset rules apply) for each accounting date falling in the period starting when the expenditure was incurred by the vendor and ending immediately before the sale to the lessor or, if the vendor does not make up accounts, for the length of that period in years rounded down to the nearest whole number.

In most cases, assets held by the vendor or persons connected to the vendor for more than 6 years can be left out of the lessor's capital allowances claim as the lower of the open market value and the notional written down value is likely to be negligible. For assets less than 6 years old, records of cost and when that was incurred are likely to be available to the vendor. Where exceptionally they are not, estimates of the original cost and date of purchase will need to be made.

The lessor will need to obtain and agree with the vendor the open market value and the details of the relevant notional written down value or values. The lessor will also need to satisfy him or herself that these are realistic and reasonable before claiming capital allowances.

Subsequent disposals and acquisitions where section 76a(2) applies

Where Section 76A(2) reduces the amount on which allowances can be claimed by the lessor, the disposal value on a subsequent disposal by the lessor is the lower of the actual sale price and the amount on which allowances have been claimed by the lessor (Section 26(2) CAA 1990).

Where Section 76A(2) CAA 1990 applies, the limit on the amount on which allowances can be claimed by the lessor also applies to any subsequent claimant (Section 76A(3) CAA 1990).

Sale and leaseback on defeased terms

Sections 76A (6) to (8) and (12) CAA 1990, which were added by Section 46 F(No2)A 1997, prevent capital allowances from going to the lessor where machinery or plant is sold and leased back under a finance lease if, as part of the leasing arrangement, the greater part of the risk that the lessee will not meet his obligations under the lease has been removed otherwise than by means of a guarantee from persons connected with the lessee.

Where Section 76A(7) applies, the rules in Section 76A(2) limiting the disposal value to the lessee do not apply. In general, the disposal value will therefore be the lower of the sale price and the cost to the lessee.

Sections 76A (6) to (8) and (12) only apply to the sale and leaseback of machinery or plant. They can apply whether or not the asset has been brought into use before the sale and leaseback. But they do not apply where the lessor purchases the asset directly from the supplier, except where the asset was previously treated as belonging to the lessee or a person connected with the lessee under Section 60 CAA 1990. Nor do they apply to sale and leaseback arrangements concerning reliefs other than capital allowances on machinery and plant, for instance industrial buildings allowance or the special reliefs for films in Section 42 F(No2)A 1992 and Section 48 F(No 2)A 1997.

It is not possible to set out all the situations where these provisions may operate because of the diverse nature of the possible transactions. However, Section 76A(7) will apply where the non-compliance risk is removed by more than 50% as a result of:

securing the obligations under the lease by cash deposits or by the pledging of assets or income, or
backing the obligations by a third party guarantee or letter of credit, whether or not these are covered by any form of deposit of cash or other assets, subject to the exceptions below.

Section 76A(7) will not apply as a result of the non-compliance risk being removed by more than 50% by a guarantee:

provided by a person connected with the lessee,
given jointly by a person connected with the lessee and a bank where that person's credit rating is higher than that of the bank,
provided by a bank which is itself counter guaranteed by a non-resident person connected with the lessee of equal or superior creditworthiness where the lessee does not have an established credit rating in the UK (primarily because it has only been trading in the UK for a short period), or
where the lessor is part of a banking group, given by it's parent bank to meet the capital adequacy requirements related to the large exposures regime provided that the guarantee is not part of any wider arrangements.

Whether arrangements remove the whole or the greater part of the non-compliance risk will ultimately depend on the amount by which that risk has been reduced. The test can be expressed as whether the leasing arrangements include provisions to reduce the risk of loss to the lessor that reduce this risk by more than 50%.

The test whether the risk of loss has been reduced by more than 50% will generally be applied as at the date the leasing arrangements commence. It will need to take account of any factors that are likely to reduce the amount of any non-compliance risk at any time during the life of the arrangements. If the terms of the leasing arrangement are altered after the commencement of the arrangements, this may need to be reviewed to determine whether it alters the effect of Section 76A.

Any request for our views on whether Section 76A(6) will apply to proposed arrangements should include a detailed technical description of the arrangements together with a plain-English summary and should be sent to:

Special Investigations Section
Room 420
Kingsway
London
WC2R 6NR

(No longer relevant)
Prosecutions and the 'Hansard' procedure
the consequences of Regina v W and another

The Court of Appeal ruling in Regina v W and Another was reported in The Times on 24 March, and caused something of a stir in the press. It has now been fully reported at [1998] S.T.C. 550. Readers may be interested in the Revenue's view of the implications of the ruling.

The case concerned a prosecution for alleged conspiracy to defraud, brought by the Crown Prosecution Service. The Indictment was lodged in 1995. The first count to be tried will be a charge of false accounting, where the motive is alleged to be tax evasion. One of the defendants was involved in negotiations that led to a financial settlement with the Inland Revenue in 1997. The settlement related to the tax liabilities of two companies allegedly controlled by the defendants in respect of periods covered by the forthcoming prosecution for false accounting based upon alleged tax evasion. The judgment of the Court of Appeal made it clear that the acceptance by the Inland Revenue of such a settlement did not prevent the Crown Prosecution Service from continuing with the pre-existing prosecution.

There has been some concern that this decision appears to pull the rug from under the feet of tax professionals and Revenue officials conducting investigations and negotiations under the so-called "Hansard" arrangement, set out in Code of Practice 9 (although the "Hansard" arrangement specifically does not offer immunity from prosecution). Such concerns are misplaced. In fact, the role of the Crown Prosecution Service has not changed. In a statement in the House of Commons on 8 April 1998, the Attorney-General made it clear that primary responsibility for prosecution in relation to tax evasion remains with the Inland Revenue. The Crown Prosecution Service will ordinarily only bring proceedings that encompass charges relating to tax evasion where that evasion is incidental to allegations of non-fiscal criminal conduct. That was the case in Regina v W and Another.

Tax professionals can therefore be assured that the law and practice of the Revenue's "Hansard" policy have not changed. Where the only suspected offence is tax evasion, it is extremely unlikely that the Crown Prosecution Service would be involved.

The existing laws on confidentiality also remain as before, to restrict the circumstances in which information which can be passed on by the Revenue. The recently-signed Convention between prosecutors does not make any change to those circumstances. The legislation in Section 182 Finance Act 1989 is very clear. Inland Revenue officials may not disclose information about an identifiable taxpayer, that has not been made lawfully available to the public, other than with lawful authority or the consent of the taxpayer. The Convention does not give lawful authority for disclosure.

The position of taxpayers who make a full disclosure under the "Hansard" practice is no different from what it was before the signing of the Convention and the Court of Appeal judgment.

Remuneration for employees in shares subject to risk of forfeiture

Shares awarded to employees by reason of their employment are generally within the scope of income tax under Schedule E. This article is about awards of shares where, if certain conditions are not met, those shares may be forfeit before the employee is free to dispose of the shares.

This article concerns only shares subject to risk of forfeiture which were awarded to employees before 17 March 1998. It does not address the Chancellor's Budget proposals on shares subject to risk of forfeiture nor any of the following matters:

shares for employees which are capable of being converted into shares of a different class;
shares awarded to employees under IR approved share schemes;
the Chancellor's proposals for clarifying and strengthening the PAYEanti-avoidance provisions;
National Insurance Contributions.

Throughout the article "employees" is used to refer to both employees and directors.

This article covers only awards of shares subject to risk of forfeiture; it does not cover cases where the employee has not yet acquired the shares.

An award of shares subject to risk of forfeiture involves an employee becoming beneficially entitled to shares at the time of the award but where the shares may be lost if conditions set at the time of the award are not met. This type of award should not be confused with one where the employee does not actually acquire shares until the relevant conditions are met.

The following examples illustrate the distinction between these types of awards:

Example 1 - Awards of shares subject to risk of forfeiture

An employee receives a share award under a long term incentive scheme which provides that he or she acquires 100 shares, but those shares must be kept in trust for a period of 3 years. If during that time he or she leaves the employment or does not meet a performance target, the employee forfeits the shares.

Example 2 -- Employee not yet acquiring shares

Under a long term incentive scheme, an employee who meets performance targets and stays with the employer for 3 years will acquire 100 shares in the employing company at the end of that period. Under these arrangements the shares are placed in trust but the employee does not acquire them until the end of the 3 year performance period.

Example 2 above -- Employee not yet acquiring shares -- is much the more common form of long term incentive plan involving shares and is not the subject of this article.

Previous practice

The Inland Revenue's Budget day Press Release Inland Revenue 36 of 17 March 1998- Remuneration in shares subject to risk of forfeiture -- explained that in the past it was accepted that the employee was liable to income tax when the risk of forfeiture was lifted. It is at this point that the value of the shares can most easily be determined. However, our legal advice now is that under the normal rules of Schedule E there is an income tax charge at the time the shares are first acquired. The charge is on the value of the shares taking into account the risk of forfeiture. No tax is chargeable at the time risk of forfeiture is lifted.

The Finance Bill provisions introduce special rules intended to ensure that shares subject to the risk of forfeiture are taxed in accordance with the earlier practice. But these rules will only apply in respect of shares acquired on or after 17 March 1998. This article explains the consequences for shares acquired before that date. This is the further guidance promised in the Press Release.

What has changed?

Taxpayers who followed the previous practice when the risk of forfeiture was lifted from shares:

will not have been charged to tax for the year in which the shares were awarded, but
will have been charged to tax for the year in which forfeiture was lifted;

Under the current practice tax would be charged for the year in which the shares were awarded and not for the year in which forfeiture was lifted.

The previous practice will often have led to a larger tax charge than would have arisen under the current practice because shares are likely to have been worth more when forfeiture was lifted than at the time they were awarded.

Where risk of forfeiture has not yet been lifted taxpayers who have been following the previous practice will not have been charged to tax for the year shares were awarded but will have been expecting to pay tax when the risk of forfeiture is lifted.

The previous practice also meant that the acquisition cost of this sort of share for capital gains tax purposes was generally the amount on which the Schedule E charge was based when the risk of forfeiture was lifted. That will usually have given a higher acquisition cost for capital gains tax purposes than the current practice under which the acquisition cost for capital gains tax purposes will generally be the amount on which the Schedule E charge is based at the time the shares are awarded.

The following example illustrates the change in our view of the tax treatment.

Example 3

Under a long term incentive plan, an employee receives 1000 free shares on 1 May 1994. These shares are subject to risk of forfeiture if the employee does not meet performance targets or leaves the employment within 3 years. The open market value of the shares taking account of the risk of forfeiture is £1,000. On 1 May 1997 all the conditions have been met and there is no longer any risk of forfeiture. The open market value of the shares at 1 May 1997 is £2,500.

Under the previous view of the law, there would have been a tax charge for 1997-98 on £2,500. There would have been no income tax charge for 1994-95.

Under the revised view of the law, there would be an income tax charge for 1994-95 on £1,000. This is also the capital gains acquisition cost on any subsequent disposal of these shares.

In both cases if the employee has paid something for the shares that would reduce the amount of the income tax charge.

What are the Inland Revenue going to do about cases affected by this change of view?

We will identify, as far as possible, all taxpayers affected by the change of view.

It is our view that up to 26 May 1995 there was a "practice generally prevailing" in this area which was accepted by the Inland Revenue, agents and taxpayers. On that date legal advice was received by the Revenue which made it clear that a change in our view of the law would have to be considered.

Our approach to these cases will depend on two factors:

when the return was made, and
on what basis the return was made.

Where an employee:

made his or her return before 27 May 1995, and
included the value of shares at the point a risk of forfeiture was lifted on the basis that a Schedule E charge arose at that time, and the tax charge in respect of that return has become final
- the position cannot now be reconsidered.

In all other cases our approach will depend on whether a return has been made and, if so, the basis on which it has been made.

In dealing with cases where the relevant return was made in line with the previous understanding of the law and the tax charge has not become final the Inland Revenue will apply three general principles:

no income tax liability arises at the time the risk of forfeiture is lifted for shares acquired before 17 March 1998;
assessments will be made in respect of awards of shares made before17 March 1998 for the year in which the shares were awarded but collection of the tax will be postponed until the risk of forfeiture has lifted. Interest on late payment in those circumstances will be calculated from 30 days after the date risk of forfeiture lifts.
where awards of shares subject to risk of forfeiture have been made before 17 March 1998 and the shares have been forfeit, no assessment will be made for the year of award. If the shares are forfeit at some future date and an assessment has already been made (in accordance with the previous bullet point) the tax charged will be written off and not collected.

These principles will also be applied in dealing with cases where the relevant return was made on or after 27 May 1995,

    (a) in line with the previous understanding of the law, and
(b) where a tax charge has become final and a claim to error or
mistake relief is made under Section 33 TMA 1970.

Where returns have been made in line with the revised view of the law and assessments for all years are final, no further action will be needed, because no adjustments to the assessments will be due.

Particular situations:

Examples

In all the following examples shares have been awarded before 17 March 1998.

Risk of forfeiture not yet lifted, and
no tax charged on award of shares, and
tax liability for year of award final

In these circumstances the Inland Revenue will make an assessment for the year in which the shares were awarded but will not seek to collect the tax until the risk of forfeiture (which originally attached to the shares) is lifted.

We will not make assessments for 1991-92 or earlier unless there is evidence of fraudulent or negligent conduct on the part of the employee.

Example 4

Under a long term incentive plan an employee receives 1000 shares on 1 May 1993. These shares are subject to risk of forfeiture. The open market value of the shares taking into account the risk of forfeiture was £1,000 on that date.

The risk of forfeiture is due to be lifted on 1 July 1998.

The value of the shares received was not included in the 1993-94 tax return or assessment on the basis that income tax liability would arise only at the point the risk of forfeiture is lifted. Risk of forfeiture is lifted as planned. A Schedule E assessment for 1993-94 is raised on £1,000. In practice this assessment will be made after the risk of forfeiture is lifted. Tax is due 30 days from the date of the assessment and interest will run from that date.

Self assessment years:

Risk of forfeiture not yet lifted, and
return for year of award not yet made or self assessment capable of taxpayer amendment

Employees who have not yet made a return for a year of assessment in which (before 17 March 1998 ) they received shares subject to risk of forfeiture should set out in the additional information box in their return the circumstances in which they received the shares and when they expect the risk of forfeiture to be lifted. The return and self assessment should include the receipt of the shares, with a valuation taking into account the risk of forfeiture; an estimated valuation should be used if an accurate valuation is not available at the filing date.

Example 5 shows what will happen for tax year 1996-7 where shares were awarded subject to the risk of forfeiture, and a return and self assessment have already been made.

Example 5

Under a long term incentive plan an employee receives1000 shares on 1 May 1996. These shares are subject to a risk of forfeiture. The open market value of the shares taking into account the risk of forfeiture was £1,000.

The risk of forfeiture is due to be lifted on 1 May 2001.

The value of the shares was not included in the 1996-97 self assessment, on the basis that income tax liability would only arise at the point the risk of forfeiture is lifted. The employee has received Schedule E income for 1996-97 of £1,000, and the self assessment should now be amended by the employee to include the amount; collection will be postponed until the risk of forfeiture is lifted.

The Inland Revenue will write as soon as possible to any taxpayers they identify as needing to amend their 1996-7 self assessments, explaining the position.

Employers who before 17 March 1998 made awards of shares subject to risk of forfeiture should continue to provide information returns to the Inland Revenue on the basis previously agreed.

Shares have forfeit, tax liability for year of award final

There is no income tax charge for the year of forfeiture. The Schedule E assessment for the year of award will not be disturbed. That is because:

If the return was made on the basis of the previous practice no amount in respect of the shares will have been included in the assessment, and we do not propose to raise any new assessment
If the return was made on the basis of the current practice it will be in accordance with the revised view of the law and no adjustment will be due.

Error or mistake claims

Employees who believe that they have been overcharged tax in an assessment because they made a return on or after 27 May 1995 in line with the previous practice may make a claim for error or mistake relief under Section 33 TMA 1970. The usual conditions of that section will need to be satisfied for a claim to be accepted.

Example 6

Under a long term incentive plan, an employee receives 1000 shares on 1 May 1990. These shares are subject to risk of forfeiture. The open market value of the shares taking into account the risk of forfeiture was £1,000. Risk of forfeiture was lifted on 1 May 1995.

The open market value of the shares at that time was £3,000 and this was included in the employee's tax return and Schedule E assessment for 1995-96. The shares did not feature in the return or assessment for 1990-91. If all the conditions for an error or mistake relief claim are satisfied, then the repayment will be the difference between the 1995-96 tax paid and 1990-91 tax which would have been due.

Capital gains tax

Where employees paid income tax on the value of the shares when the risk of forfeiture was lifted and no adjustment has been made, for example by allowing an error or mistake claim, the capital gains acquisition cost of these shares will be the value taken into account for income tax purposes.

In other cases the capital gains acquisition cost of shares acquired before 17 March 1998 is their market value taking into account the risk of forfeiture.

Operation of PAYE

Before 27 November 1996 the PAYE regulations did not require the operation of PAYE on the receipt of any taxable income in the form of shares where the shares were in the employer company or a company controlling the employer company. This was achieved by excluding "own company" shares from the definition of tradeable assets.

From 27 November 1996 the exclusion from the definition of tradeable assets for own company shares was removed. This change had the effect of bringing most awards of shares within the scope of PAYE.

Anyone with questions about the operation of PAYE and Section 144A, or anything else covered in this article, should write to:

Val Price
Technical Adviser
Employee Share Schemes Unit
Savings and Investment Division
Room 128A
Bush House
South West Wing
Strand
London
WC2B 4RD.

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

Reviewing the first year of self assessment:
making payments

The Inland Revenue is reviewing the first year's experience of Self Assessment (SA): what went well, what did not go so well, what improvements can be made in the future? Taxpayers and agents coped well with the introduction of SA and we are grateful for all your efforts, and particularly with the achievement of 8 million completed returns by the 31 January deadline.

Dealing with any new system is not easy and reviewing the first year will:

provide valuable evidence on how we can make it more efficient for taxpayers, agents and ourselves, and
identify how taxpayers and agents can help us to improve our efficiency and service to them.

In February the Financial Secretary, Dawn Primarolo, MP invited comments from the public. We will also be continuing the consultations that have taken place throughout the development of SA, particularly with the representative bodies. We will be letting you know the outcome of those consultations as they emerge, but you will need to be patient: we want to analyse problems carefully and test any proposed solutions properly before introducing them; and some changes may take time.

This article picks up the findings of one early internal review around making payments. We are looking at what longer term change might be necessary, or useful, in this area but for the moment we need to operate with the system as it was introduced.

This article:

tells you about the statements we will issue to notify the payment due by 31 July, and
explains how you can help us when making payment.

Statement issue: second payment on account

The statements of account for the second payment on account will be issued in late June and early July. We are expecting to issue around 2.5 million statements. The extraction and printing of the statements is spread over a period so it is not possible to say when a particular taxpayer's statement will be issued, but if statements have not been received by Monday 13 July you should contact your tax office.

You will be able to identify whether a payment on account is due from the statement of account agent details issued to you in late April or early May; the second payment on account will be the same as the first and should be the amount shown on that statement unless a claim to reduce the payments on account has been made subsequently.

Agents who are linked to the Electronic Lodgement Service will receive an electronic copy of the statement issued to their client; some of you may also have used the option of having the client's paper statement issued to yourself, for which authorisation is needed on form 64-8.

Making payment

It is very important that the payslip issued with the statement is used with the payment for that taxpayer. The payslips contain encoded personalised details. These ensure the payment is allocated quickly to the right account. We recommend that payment is made by Bank Giro or Girobank. These are the most efficient and secure ways of ensuring a payment reaches the correct taxpayer record in the shortest time possible.

If a cheque payment is to be made by post, please send it to the Accounts Office in the envelope provided accompanied by your client's personalised payslip. This payslip provides the vital details needed to allocate the payment to your client's account promptly. All money will be banked straightaway but delays will occur in updating your clients' records if, for example:

we cannot identify the correct taxpayer account quickly,
payment is made to a local office instead of an Accounts Office.

Where there is a delay there is then a risk that a further statement will be issued in August seeking payment of the apparently overdue amount.

Replacement payslips

We recognise that you or your client may on occasion need a replacement payslip. In these circumstances you should contact your local tax office well in advance of the payment date for a fresh payslip. We are reviewing what we can do to make it easier to provide you or your client with payslips on request. However, if you pay electronically, for example, by telephone or PC banking, you do not need a payslip.

Composite payments

Last of all a special word about composite payments, for example, payments by partners. For a variety of reasons these payments caused us the most difficulties and suffered the most from delays.

Fuller details are given in the 1997-98 Partnership Tax Return Guide on page 16 but a few key points are mentioned here. If you choose not to pay by Giro or Girobank and send us a cheque covering more than one taxpayer (or partner) please ensure there is a separate personalised payslip for each of the taxpayers. And if there are more than 99 taxpayers, please send a separate cheque with each bundle of 99 payslips or less. If you do not send payslips for each of your taxpayers there is a real risk that their records will not be updated promptly or correctly.

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

Tax law rewrite project

Background

The aim of the Tax Law Rewrite project is to rewrite all or most of the United Kingdom's existing primary direct tax legislation so that it is clearer and easier to use, without changing or making less certain its general effect.

On 19 May 1998 we published "Plans for 1998-99", the second in a series of documents which set out our programme of work for the future. (The first of these documents, "Plans for 1997" was published in December 1996). "Plans for 1998-99" both reviews progress on the project during its first year, and sets out its work programme for the current year.

Progress in 1997-98

For various reasons progress on rewriting legislation last year was slower than originally hoped. The need to divert some drafting resources to Finance Bill work was a temporary setback, and meant that we were unable to publish as much draft legislation for consultation as we expected. However, the main reason was the intrinsic difficulty of the rewrite task, if it is to be done well. We had not realised just how long it would take to research and analyse the existing legislation and then restructure it with the appropriate level of internal and external consultation.

Nevertheless, we believe that we can point to a number of worthwhile achievements in 1997-98. Together with some changes in our approach, these should provide a good platform for more rapid progress in future.

The responses to consultation suggest that there is general agreement among the tax community that the rewrite project is worthwhile and that our rewrite techniques will result in legislation that is clearer and easier to use.
The Steering Committee has been successfully established as an independent body which actively provides the strategic direction for the project, and reassures Ministers and tax professionals that private sector concerns are properly addressed.
The Consultative Committee has also been successfully established to ensure full consultation on rewritten law.
Our general approach to external communications has been generally welcomed: in particular our readiness to consult at an early stage on 'work in progress' and the quality of our published material.
The project has received cross party support from both Houses (which enabled the agreement in principle of new Parliamentary procedures for the enactment of rewrite Bills in future).
The multidisciplinary approach to working within the project team is proving to be highly successful.
Diverting some drafters to Finance Bill work has allowed some of our rewrite techniques to be used in Finance (No2) Bill 1998. For example, in addition to proposing new measures for CT Self Assessment, Schedule 18 of the Bill reorders the existing provisions in a more logical way, and rewrites them as plainly as possible.

Publications

We have also published three documents. Our first Exposure Draft, published in July 1997, rewrote the core provisions relating to the trading income of individuals, and our first Technical Discussion Document, published in November 1997, tested our rewrite techniques on complex legislation. It did this by an illustrative rewrite of the provisions on trading losses of companies. Both these documents were well received, with the rewritten law in both cases seen as significantly clearer and easier to use than existing legislation. In addition we received many helpful comments on both of these publications. Papers summarising the comments received and our conclusions have been sent to all those who commented, and are also published on the Internet

In February 1998 we published a Second Technical Discussion Document. This aimed to determine the possible role -- if any -- that purposive drafting might play in the rewrite. It did so by illustrating what the company trading loss provisions rewritten in the first Technical Discussion Document would look like if redrafted according to a number of different purposive approaches. The deadline for comments on this document was 29 May, and we are now considering the responses.

Plans for 1998-99

Over the next twelve months or so, we intend to publish around half a dozen further Exposure Drafts. On current plans we hope that these will be published as follows:

July 1998
First Exposure Draft on capital allowances. This will include material on allowances for industrial buildings.
September 1998
First Exposure Draft on savings and investment income. This will cover the legislation relating to income currently taxed under Schedule D Case III.
December 1998
Second Exposure Draft on capital allowances.
This will include material on allowances for machinery and plant.
January 1999
First Exposure Draft on employment income.
This will probably cover the rewritten legislation relating to the main charges.
March 1999
Third Exposure Draft on capital allowances.
This will consist of further material on capital allowances.
March 1999
Second Exposure Draft on trading income.
This will cover most of the remaining provisions relating to trading income.
Mid 1999
Second Exposure Draft on savings and investment income.
This will cover distributions made by UK companies and the remainder of the savings and investment income provisions.

On present plans, our first Bill will be on capital allowances. Following full consultation on the three Exposure Drafts described above, we hope this will be ready for enactment as soon as possible in 2000. But our main work will continue to be on income tax for individuals. We originally planned for a single Income Tax Bill covering all the relevant provisions, but we shall consider whether there is any scope for enacting discrete blocks of legislation as they are finalised.

(Article deleted since index 2002)

Self Assessment Tax Returns:
E mployment pages and tax equalisation - payments on account (POAS)

Some employees are tax equalised, that is, under the terms of the agreement between the employer and the employee, the employee is entitled to specified net cash emoluments and non-cash benefits. The employer undertakes to meet the UK income tax arising from the net cash emoluments and benefits.

In most cases, under special arrangements made under regulation 102 of the PAYE regulations, the employer accounts for nearly all the tax due in the year through the PAYE system by deducting and accounting for tax on a gross up of both the cash and the non-cash benefits.

In cases where PAYE tax is accounted for as in paragraph 2 above, the Inland Revenue use their power under Section 59A(9) Taxes Management Act (TMA) to direct that POAs are not needed. It is unlikely that they will be due, but the direction saves the employees the need to do the calculations.

However in some cases employers choose not to account for tax through PAYE on a gross up of both cash and non-cash benefits. They may only operate PAYE on grossed up cash. In these circumstances the Inland Revenue have not made any directions that POAs are not needed.

Employers have been making the 1997-8 POAs on their employees' behalf and we have been asked how they should be dealt with in the 1997-8 SA return and employment pages, as help sheet IR212 does not cover the point. (The point did not arise for 1996-7, as Schedule E income did not feature in the calculation of payments on account for 1996-7 in tax equalisation cases.)

Although the payment of POAs by the employer constitutes the meeting of an employee's pecuniary liability, the Inland Revenue are content that in tax equalisation cases where full in-year gross up is used, payments on account should not figure in the employment page. They should not be entered at box 1.12, and grossed up tax on them should not be entered at box 1.8.

The POAs made for 1997-8 should be set off in the normal way in box W60 of the 1997-8 tax calculation working sheet.

The section on payments on account in IR212 will be expanded in the 1998-9 imprint to cover the matters set out in this article.

Interpretations

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

Capital allowances:
Notification of expenditure on machinery or plant under Self
Assessment for Income Tax cases

Section 118 Finance Act 1994 imposes an obligation to give notice of expenditure on machinery or plant. For income tax cases, the time limit is 31 January, 22 months after the end of the year of assessment.

Statement of Practice 6/94 sets out the form of notification and the general criteria which the Board would adopt in considering applications for extending the time limits. It was written before the self assessment provisions were finalised and we have been asked how expenditure on machinery and plant should be notified for income tax cases under self assessment.

We have previously accepted that the notification requirement will normally be met if the expenditure is included in a tax computation submitted within the time limits. This will usually be in the computation of capital allowances. However, under self assessment, there is no requirement to send in a capital allowances computation, nor is separate provision made in the return to notify expenditure.

For income tax cases under self assessment, we will accept that a claim for capital allowances incorporated in a self assessment return (or amended return) will give satisfactory notification of the expenditure on machinery and plant included in the underlying computation of the claim, provided that the return has been made within the time limit of Section 118 FA 1994.

Capital allowances:
Machinery and plant fixtures -
Election to determine disposal value - section 59B CAA 1990
(Article no longer current)

This article explains the circumstances in which the Revenue will accept a single election made under Section 59B Capital Allowances Act 1990 covering a number of different machinery or plant fixtures.

Where a person who has claimed capital allowances on a machinery or plant fixture disposes of the qualifying interest in the land or building to which it is fixed, either by the sale of that interest in land or by the grant of a lease in respect of which a Section 55 CAA 1990 election is made, it is necessary to make an apportionment under Section 150 CAA 1990 of the capital sum paid on the sale or grant of a lease to determine the proportion of that sum attributable to the fixture. The disposal value to be brought into account for capital allowances purposes is generally the lower of this amount and the original cost of the fixture to the vendor.

Section 59B CAA 1990 was introduced by Finance Act 1997 to remove the burden and expense of making the apportionment. Where the vendor has to bring in a disposal value, Section 59B allows the vendor and purchaser to make a joint election to determine how much of the capital sum is to be attributed to the fixture, subject to a limit of the lower of the original cost of the fixture to the vendor and the sale price. The form of the election is specified in Section 59C CAA 1990.

In strictness, as the fixtures rules in Chapter VI, Part II, CAA 1990 work on an asset by asset basis, a Section 59B election would need to be made in respect of each individual fixture. In practice, we accept that the fixtures rules may be applied to groups of assets provided that this does not distort the tax computation. In particular, we will normally accept a single Section 59B election covering a group of fixtures or all the fixtures in a single property, but we will not accept a single election covering fixtures in different properties, for instance where a portfolio of properties are sold together.

Update of earlier capital allowances articles
(Article no longer current)

There have been various articles on capital allowance issues in Tax Bulletin. Parts of these have been overtaken by later developments. This article explains the changes to the previous articles and some new points of interest.

Glasshouses - issue 5, page 46

The article gives the Revenue's view of the features that would need to be present before a sophisticated glasshouse might be treated as plant.

Such glasshouses are now considered in paragraph 5(2) Schedule AA1 CAA 1990. This provision does not automatically class them as plant, rather they are not statutorily prevented from being plant because they are fixed structures. Each case will continue to be considered on its own merits.

Paragraph 5(2) applies to expenditure incurred on or after 30 November 1993, unless incurred before
5 April 1996 in pursuance of a contract entered into before 30 November 1993. However, it does not alter the treatment of glasshouses, and the guidance in the Tax Bulletin article is still directly relevant.

Glasshouses - long-life assets - issue 30, page 445

In an article on long-life assets in Tax Bulletin 30, we invited industry-wide agreements on which assets are, or are not long-life assets. We have now reached the first such agreement, although it is not binding on individual taxpayers. We have agreed with the NFU that sophisticated greenhouses which qualify for allowances as machinery and plant are not long-life assets. The text of the agreement is as follows:

We pleased to inform you that, in the light of the information and explanations provided by you, the Inland Revenue accepts that such glasshouses built to current designs have a useful economic life not exceeding 25 years and will not therefore be long-life assets for the purposes of Sections 38A to 38H CAA 1990.

We will need to review the position in the future because designs and technology will not stand still. We therefore propose that this agreement should include only expenditure incurred up to 31 December 2005. Of course, if glasshouses are developed before that time which have a useful economic life exceeding 25 years, they will necessarily be outside this agreement.

Machinery and plant fixtures - issue 13, page 166

Part 2 of the article in Issue 13 explained that an election under Section 53(1)(b) CAA 1990 between an equipment lessor and lessee could not be made if the agreement for the lease were entered into before the lessee had started to trade.

Section 53 was amended by Paragraph 3(5) Schedule 16 Finance Act 1997 to remove this bar on the election. Part 2 of the article therefore no longer applies.

For agreements entered into on or after 19 March 1997, Section 53(1A) allows an election to be made where the agreement is entered into before the lessee has started to trade but, where this happens, the lessor is treated as not having incurred the expenditure, and therefore does not become entitled to allowances, until the lessee starts to trade.

Meaning of "colony" - issue 16, page 208

This article contains a list of colonies for the purposes of Section 33E CAA 1990 relating to the provisions for rollover relief for balancing charges arising on ship disposals. Hong Kong was included in the list. It should now be removed.

Following the transfer of sovereignty to China, Hong Kong is no longer a colony. This means that ships registered in Hong Kong after 30 June 1997 will not have been registered in a relevant register and will not be qualifying ships.

Ships registered in Hong Kong before the hand-over will still be qualifying ships for the purposes of Sections 33A to 33D if they remain on that register or any other relevant register for the whole of their qualifying period.

Enterprise zones:
Industrial buildings allowances on partially completed buildings

This article clarifies our interpretation of the industrial buildings allowances available where a partially completed building is acquired in an Enterprise Zone. All statutory references are to the Capital Allowance Act 1990 (CAA 1990).

If a person incurs capital expenditure on the construction of a qualifying building or structure under a contract entered into during the life of an enterprise zone, such expenditure will normally qualify for a 100% allowance under Section 1.

Alternatively, if a person purchases the relevant interest in a qualifying building or structure before the building or structure is first used, the purchaser will normally qualify for a 100% allowance under Section 1, through the provisions of Section 10A, based on the net price paid for the relevant interest.

In some cases, a person may acquire the relevant interest in a qualifying building or structure in an enterprise zone before the construction has been completed. We have accepted in the past that the payment by the purchaser should be divided between:

the purchase of the relevant interest, in relation to the developer's construction expenditure already incurred, in a partially completed building or structure (referred to as the "Section 10A element" in this article), and
the developer's obligation to complete the building (referred to as the "pure Section 1 element" in this article)

and, provided that the purchase is made before the expiry of the enterprise zone, the purchaser will normally be entitled to a 100% allowance in respect of both elements.

Many of the schemes we have seen have been structured as the sale and purchase of the relevant interest in the partially constructed building or structure, with additional clauses and guarantees included obliging the developer to complete the construction. The contract may make no distinction in terms between the Section 10A and pure Section 1 elements.

We have recently received legal advice which suggests that such schemes may not be effective in regard to an entitlement to capital allowances on the pure Section 1 element as the contract is for the sale and purchase of an interest in a building or structure. The terms of the contract may be insufficient to enable the purchaser to "step into" the construction contract and thereby incur construction expenditure on the pure Section 1 element, for instance if the developer is required to complete the construction works at its own cost (even if ultimately met from funds from the purchase) or the developer is granted or retains an interest in the property during the construction period.

In order to ensure that the purchaser will be entitled to capital allowances on both the Section 10A and pure Section 1 element, it would be advisable to ensure the contractual separation of the purchaser's obligations to purchase the relevant interest in the partially completed building or structure from the purchaser's arrangements with the developer to secure the completion of the building or structure by incurring construction expenditure on the purchaser's own account.

In such cases, it will also be necessary to make an apportionment under Section 21(3) CAA 1990 to determine the proportion of the price paid by the purchaser attributable to qualifying and to non-qualifying assets (for example land). Notwithstanding any contractual separation of the elements, we consider that the scheme should be looked at as a whole, apportioning the total purchase price paid by the purchaser to determine the aggregate of the Section 1 and Section 10A elements.

This change of interpretation will apply to contracts entered into on or after the publication of this article
(15 June 1998). We will not seek to apply it to contracts entered into before that date provided they do not include artificial features designed to inflate the amount qualifying for allowances or form part of a wider scheme of tax avoidance transactions.

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

Foreign income dividends and employee benefit trusts

A large number of companies have set up employee benefit trusts. Commonly the trustees of such a trust will hold shares in the company and it is a condition under the trust deed or a separate agreement that the trustees will waive substantially all of the rights to receive dividends on those shares.

Section 246A(3) Income and Corporation Taxes Act (ICTA) 1988 precludes a Foreign Income Dividend (FID) election where there are, "arrangements for the holder to choose whether, or in what form, dividends are to be paid...". We have been asked whether the requirement for the employee benefit trust to waive dividends means that the company cannot elect to pay a dividend as a foreign income dividend.

The potential difficulty with Section 246A ICTA 1988 stems from the fact that while the concern underlying subsections (3) -- (8) is streaming, their purpose can reasonably be characterised as to ensure that no dividend is a FID unless a dividend on the same terms is paid to all the shareholders, disregarding any fixed rate preference shares.

The clear assumption is that any shares to be regarded as shares of the same class will carry the same rights and yield the same amount by way of dividend. The clear purpose of Section 246A(3) is to preclude an election where there are arrangements for the amount or form of the dividend to vary from one shareholder to another.

The expression used is "arrangements for" and not "arrangements by which"; indicating that one is looking for an arrangement which either on its own or in combination with others, some or all of which may have been introduced for totally different reasons, was intended to create the capacity for differences between the dividends received by different shareholders. A simple waiver clearly has that capacity but does not, on its own, constitute "arrangements for the holder to choose".

The assumption is that every holder of shares properly to be regarded as shares of the same class will have the right to the same dividend and, if this is no longer the case or it could cease to be so either permanently or temporarily, that the shareholder will have been a party to that outcome. It is our view that the word "choose" has to be construed in that context and interpreted accordingly.

If in a particular case, it could reasonably be said that the shareholder could not be regarded as having any choice in the outcome, it is arguable that the shares cannot be regarded as shares of the same class for this purpose. If this is not the case, then it is our view that Section 246A(3) will normally be in point.

One of the issues that has been raised with us is whether, even if this is the case, it can apply to the other shares of the same class which are not affected directly by the arrangements. It is our view that it does because these arrangements have the capacity to apply to any of the shares of that class. It could be argued in relation to stapled stock that if only non-resident shareholders can apply for stock in a non-resident subsidiary to be stapled to their shares, the shares held by the resident shareholders do not carry a right to choose to be paid a dividend by a company other than the one which issued the share, but that could not be so if they passed into the hands of a non resident. In the same way, arrangements that affect the amount or form of the dividend on shares held by a particular person are capable of applying to any of the shares of that class.

The word "choose" does, however, imply a choice between alternatives. In the cases involving employee benefit trusts which have been drawn to our attention, there has been no evidence of a compensating benefit to the trust arising from the waiver.

We have concluded that where there is no evidence of streaming or any compensating benefit to the trust, it can be accepted that there are no arrangements for the holder to choose whether, or in what form, dividends are to be paid and that Section 246A(3) does not apply.

Intra-group interest and similar sums treated as distributions

Issue 17 of Tax Bulletin included an article on this topic which set out our general approach to the legislation introduced by Section 87, Finance Act 1995. It indicated that a subsequent article would appear in due course dealing with some of the more detailed points of interpretation to which the, then new, law was giving rise. The intention was to identify topics where taxpayers and their advisers were finding difficulty in practice and to offer clarification of our views on these. In fact, to date, the rules have given rise to very few problems of which we are aware. Nonetheless, various representative bodies have indicated that they believe it would be useful to record in Tax Bulletin some of the explanations given to them when the rules were first introduced. What follows therefore is a selection of the main questions put to us about subsection (2)(da) of Section 209, Income and Corporation Taxes Act (ICTA) 1988 and the related changes to other parts of Section 209 and Section 212, together with our answers.

Does the legislation apply to "upstream loans" - ie, borrowing by a parent from a subsidiary?

Section 209(2)(da) only applies where the issuing company (the borrower) is a 75% subsidiary of the other company or both are 75% subsidiaries of a third company. So, where the borrower is the ultimate parent of the world-wide group the legislation will not be in point. On the other hand, where the borrower is the parent of the lender but is a 75% subsidiary of another company, the legislation will potentially apply. It should be borne in mind, however, that, normally, interest paid in such circumstances will only be characterised as a distribution where the entire UK grouping (excluding the lender) borrows more than would have been possible at arm's length, where the borrowing would not have happened between independents, or where terms or conditions exist which would not be found between independent persons.

The exceptional treatment for borrowings by the ultimate group parent mirrors the treatment under the legislation which existed before 1995. In this respect there was no intention to depart from the previous rules to any greater extent than was necessary in the course of providing a more level playing field for inward investment. Although Section 209(2)(da) does not apply in such cases, it may nonetheless be necessary to consider the wording of any relevant tax treaty to determine how interest paid on the borrowings should be dealt with for tax purposes.

Do any of the UK's tax treaties prevent section 209(2)(DA) applying?

Although the 1995 rule was designed to provide as level a playing field as possible for intra-group inward investment, the individual wording of a few of the United Kingdom's tax treaties has the effect of limiting the extent to which this objective could be achieved.

The terms of our tax treaty with Spain are such as to prevent excessive intra-group interest being treated as a distribution. Moreover, our treaties with:

Austria;
Fiji;
Israel;
South Africa; and
The Sudan

are worded in a way which allows Section 209(2)(da) to characterise excessive interest as distributions but prevents the paying company being denied a deduction for such distributions. Otherwise, we believe the terms of our tax treaties are such as to enable the 1995 rules to apply unhindered.

Is section 808a ICTA 1988 now redundant?

Why does section 209(8a) apply section 209(8a) apply section 808a for the purposes of section 209(2)(DA)?

Why is the list of matters outlined in section 209(8b) similar to, but differently worded from, the equivalent list in section 808a(2)?

Section 808A ICTA 1988 is an aid to interpreting certain "special relationship" provisions in the interest article of a number of our treaties. An aim of the 1995 domestic legislation was to broaden the range of cases to which the approach provided for in these treaties applied. Consequently where Section 209(2)(da) applies, it achieves the same result as a combination of the former domestic rules and treaty wording of the type dealt with in Section 808A(2) to (4). Nonetheless, Section 808A is not redundant since it continues to assist in construing the relevant treaty wording in cases where the 1995 distribution rules do not apply -- ie, where the borrower is the ultimate group parent or where there is a special relationship between the parties which falls short of the 75% shareholder connection specified in that law.

To ensure that the approach of Section 808A was generalised in the 1995 domestic legislation, Section 209(8A) provided that, for the purposes of Section 209(2)(da), the Section 808A rules are to apply in the same way as they apply for the purposes of a treaty special relationship provision. To make this effective it was necessary to do two things. First, the treaty term "special relationship" to which Section 808A refers had to be aligned with the domestic law phrase "relationship, arrangements or other connection" which appears in Section 209(2)(da). This is done in sub-paragraph (a) of subsection 209(8A). Secondly, it was necessary to ensure that the hypothetical special relationship provision introduced by subsection 209(8A) was one of the type to which subsections (2) to (4) of Section 808A would apply in determining what impact, if any, relationships involving borrower, lender and other parties might have had on the existence, quantum, interest rate or other terms of the loan. Subparagraph (b) of subsection 209(8A) together with subsection (8B) identify the hypothetical special relationship provision as being of the relevant type and so set the stage for subsections (2) to (4) of Section 808A to apply for the purposes of subsection 209(2)(da).

Although there appears to be a significant degree of overlap between (8B) and 808A(2), they are in practice doing different things. Subsection (8B) describes the subject matter of the hypothetical provision whereas subsection 808A(2) as amended indicates factors to be taken into account in applying that provision for the purposes of new subsection 209(2)(da).

What is the difference between the section 209(2)(DA) relationship referred to in subsection 209(8a)(a) and the relationship referred to in sub-paragraph (b) of the subsection?

Subparagraph (a) refers to the relationship, arrangements or other connection between the borrower and the lender. Subparagraph (b) is concerned with any relationship, arrangements or connection between the borrower and any other person.

Where the borrower's trade involves dealing with the lender or other non-uk members of the group, does the legislation's emphasis on disregarding any relationship, arrangements or other connection (whether formal or informal) between the borrower and connected companies who are not part of the uk grouping mean that the borrower's trading income has to be disregarded for the purposes of the legislation?

We do not believe the legislation requires us to go so far. We are required to disregard the relationship, arrangements or connection with these other group companies, but not to disregard the fact that the borrower has a real source of income which an unrelated lender would take into account in considering whether, or how much, to lend. So, provided the intra-group trading is conducted on arm's length terms, we do not believe that the legislation requires us to assume that the borrower had no source of income whatsoever.

Will the Revenue provide illustrations of how the "UK grouping" rules in subsection 209(8d) work?

The "UK grouping" may consist of:

just the issuing company (or borrower) itself;
the issuing company and its effective 51% subsidiaries (wherever resident);
the top UK holding company in respect of which the issuing company is a 51% subsidiary [subject to subsection (8E)] together with all that holding company's 51% subsidiaries (wherever resident)

Figures i -- iii illustrate these cases in turn.

Image: Fig.1 [60k]

Image: Fig. 2 [38k]

miscellaneous

Revenue Prosecutions

Readers will be aware of the Revenue's policy of selective prosecution involving the most serious cases across the whole range of the tax system. The Board sees this as an important part of its strategy to deter tax fraud and evasion. As part of the wider publicity for this strategy, we will be publishing details of Revenue prosecutions in this and future issues of Tax Bulletin.

Convictions since the start of January 1998 are:

Graham Roger Duggua

Payments received by Mr Duggua from customers of his taxi business were omitted from records supplied to the Revenue. He pleaded guilty to three charges of false accounting and was sentenced to 9 months imprisonment, suspended for 2 years.

Leo Colton

Mr Colton was sentenced to 18 months imprisonment after fraudulently overstating the expenses of his earth-moving business. He was also ordered to pay £11,500 costs. The estimated tax loss to the Revenue was £75,000.

Brian Roger Allen

Mr Allen was sentenced to 7 years imprisonment on 13 charges of cheating the public revenue involving a number of offshore companies. The tax loss was certified by the Judge as £4,000,000 and a confiscation order was made in the sum of £3,137,135. Default in payment of the sum will result in a further 7 years imprisonment.

Kumal Pasha Hafeez, Sibghtulla Anjam Hafeez, Murtza Hafeez

These men operated a chain of garages across the Midlands and made payments to employees without deduction of tax. They were each sentenced to between 9 and 12 months imprisonment for failing to pay tax and VAT.

Jeff Bentley, Stuart Bentley, Henry Barnes, Andrew Stead, Terrence Salmon

The charges related to three companies with an estimated loss to the Exchequer of around £2.5 million. Those named above received sentences ranging from community service to, in one case, a custodial sentence of 3 years. They were each disqualified from serving as company directors for periods ranging from 3 to 7 years.

Makhan Singh Manku

Mr Manku ran several restaurants but failed to declare the profits to the Revenue. He was sentenced to 3 years imprisonment and was disqualified as a director for 4 years. He was also ordered to pay costs of £123,447. The judge ordered a confiscation order of £1,370,660, the agreed tax lost to the Revenue. If this was not paid within 3 months, Mr Manku would receive a further 7 years imprisonment.

James Healy, Sean Healy, Jeremiah Ryan

These three men each received prison sentences of up to 2 years for misuse of Inland Revenue subcontractors documents. The fraud resulted in a tax loss in excess of £390,000.

Anthony Kenneth Lewis

Mr Lewis, a haulage manager, was sentenced in connection with wages payments he made without the proper operation of PAYE. He was sentenced to 3 years imprisonment and was disqualified from being a director for 7 years. The loss of tax to the Revenue was estimated at £638,000.

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

Tax treaty network:
update

The UK has the largest network of tax treaties anywhere in the world; there are treaties with more than 100 countries. This network is an asset of significant value and widely recognised for its role in helping to maintain the competitiveness of British business and to facilitate UK cross-border trade by providing certainty of treatment and protection from discrimination abroad.

Recent developments

Hong Kong

The text of the Double Taxation Article contained in the new Air Services Agreement between the United Kingdom and the Hong Kong Special Administrative Region was laid before the House of Commons on 2 June 1998 for approval and has been published as a Schedule to a draft Order in Council.

Copies of the draft Order can be obtained from The Stationery Office.

Kazakhstan

The text of the Protocol, which was signed on 18 September 1997 in London, to the 1994 Double Taxation Convention between the United Kingdom and Kazakhstan, was laid before the House of Commons on
2 June 1998 for approval and has been published as a Schedule to a draft Order in Council. Copies of the draft Order can be obtained from The Stationery Office.

Kuwait

Further discussions were held in March 1998 on the proposed text of a comprehensive Double Taxation Agreement (DTA) between the United Kingdom and Kuwait. Agreement was reached on a text which will be submitted to the respective Governments for approval.

Lesotho

The DTA with Lesotho entered into force on 23 December 1997. It took effect in Lesotho on 1 April 1998 and in the UK on 1 April 1998 (Corporation Tax) and 6 April 1998 (Income and Capital Gains Tax). Copies of the Order (Statutory Instrument 1997 No. 2986) can be obtained from The Stationery Office.

Oman

A new comprehensive Double Taxation Agreement between the United Kingdom and Oman was signed in London on 23 February 1998. The text of the Agreement was laid before the House of Commons on 2 June 1998 for approval and has been published as a Schedule to a draft Order in Council. Copies of the draft Order can be obtained from The Stationery Office.

Republic of Ireland

Agreement has been reached at official level on the text of a protocol to the Double Taxation Agreement between the United Kingdom and the Republic of Ireland in May 1998. A further announcement will be made when the text of the Agreement has been approved by the respective Governments.

Russia

The Double Taxation Agreement with Russia took effect in Russia on 1 January 1998 and in the UK on 1 April 1998 (Corporation Tax) and 6 April 1998 (Income and Capital Gains Tax). Copies of the Order (Statutory Instrument 1994 No. 3213) can be obtained from The Stationery Office.

Treaty network overview: 1998-99 programme

Each year, the Inland Revenue reviews its treaty priorities to make sure they meet the needs of the Government and those of the business community. As part of this exercise, the Revenue monitors the treaty networks of other countries and consults the top 50 UK companies, the main representative bodies and other Government departments. The results are used to produce a working plan for the following treaty year.

In the light of this exercise, the Financial Secretary to the Treasury, Dawn Primarolo, MP, has recently approved the priorities for the United Kingdom's network of double taxation treaties for 1998-99.

Priorities for 1998-99

The first priority for the coming year will be to secure the entry into force of new treaties, or protocols to existing treaties, made with Canada, Hong Kong (Air Services), Ireland, Kazakhstan, Oman and Norway.

Another priority will be to complete new treaties, or protocols to existing treaties with France, Germany and the Netherlands.

At the same time, we expect to have negotiations for new or updated treaties with Botswana, Chile and Ireland. We also hope to hold exploratory talks with a number of countries in the Middle East.

Industry has made a number of representations about the desirability of concluding a treaty with Brazil. This remains a priority for the medium to long term. However, after two recent negotiating rounds, it is clear that there is no early prospect of resuming negotiations with Brazil on a basis likely to produce an acceptable treaty. This is a view we share with other OECD countries.

Year to 31 March 1998

Details of the UK Tax Treaty Network (as at 31 May 1998) are given below.

Representations

Representations generally about new treaties or suggestions about changes to existing treaties are always welcome and should be addressed to:

Eilish Vaughan
Inland Revenue
International Division
Room 314
Strand Bridge House
138-142 The Strand
London
WC2R 1HH

Telephone: 020 7438 6051

Questions about the effects of a double taxation agreement on a particular taxpayer's affairs should be addressed to the Inland Revenue office responsible for that taxpayer.

Double taxation issues arising in connection with estates, inheritances and gifts are regulated by separate treaties. Representations for new or revised agreements for estates, inheritances and gifts should be addressed to:

David McDonald
Inland Revenue
Capital and Valuation Division
Room 309
22 Kingsway
London
WC2B 6NR

Telephone: 020 7438 7741

The United Kingdom's World Network of Double Taxation Agreements (as at 31 May 1998)

1. Agreements in force

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

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

(1) The agreement with the Soviet Union signed on 31 May 1985 (Statutory Instrument 1986 No. 224) is to be regarded as in force between the UK and the former Soviet Republic 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 agreement with Yugoslavia signed on 6 November 1981 (Statutory Instrument 1981 No. 1815) is to be regarded as in force between the UK and Croatia, Macedonia, Slovenia, and the Former Republic of Yugoslavia. The position as at 31 May 1998 with regard to the remainder of former Yugoslavia was undetermined.

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

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

(1) Air Transport agreements which were not terminated by the later Comprehensive agreements and remain in force alongside them.

c) Agreements covering estates, gift and inheritances

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

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

Copies of all the various types of individual agreement in force can be obtained from The Stationery Office, 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 May 1998)

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

Comprehensive agreements

*BELARUS                               *MALAYSIA
ECUADOR                                NAMIBIA
FRANCENORWAY
GERMANY                                *OMANKUWAITUNITED ARAB EMIRATESLITHUANIA

Protocols amending existing agreements

CANADA                                 JERSEY
ICELAND                                KAZAKHASTAN
IRELAND (REPUBLIC OF)                  NETHERLANDS

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

HONG KONG*

* Signed/Concluded but not in force.

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

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Corporation tax:
case v: relief for underlying tax - section 799 ICTA 1988

Tax Bulletin Issue 2 (February 1992 page 14) gave contact details for the Customer Service Information Leaflets provided by the Double Taxation (Rates) Section of FICO. The leaflets give general guidance as well as detailed information needed for many countries' underlying tax rate calculations. The contact details have changed to the following;

Ms Pat Winnett
DT (Rates) section
Financial Intermediaries and
Claims Office
Fitz Roy House
P O Box 46
Nottingham
NG2 1 BN

Telephone: 0115 974 2033.

Inland Revenue Statements of Practice and Extra-Statutory Concessions issued between 1 April 1998 and 31 May 1998

Extra Statutory Concessions

There have been no Extra Statutory Concessionsissued in this period

Statement of Practice

There have been no Statements of Practice issued in this period

You can get copies of SPs and ESCs from Christine Jordan at the Inland Revenue Information Centre, Ground Floor, South West Wing, Bush House, Strand, London WC2B 4RD. 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.
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, Jeremy Sherwood, 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 1998 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 information regarding Tax Bulletin subscription or distribution please contact Miss S. Williams, Room 426, 22 Kingsway, London WC2B 6NR. Telephone: 020 7438 7700. For more general information regarding Tax Bulletin, please contact Ms Nahid Shariff, Assistant Editor, on 020 7438 7842 or at the address below.

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, Assistant Editor, Room 435, 22 Kingsway, London WC2B 6NR.

Tax Bulletin provided in web ready format courtesy of tax analysts and taxbase

Tax Bulletin issue 35

Inland Revenue Tax Bulletin Issue 35

Contents

(Superceded by CA 28600) Capital Allowances on finance leases:

Introduction

Finance lease

Starting date

Writing-down allowances for finance lessors

Interaction with the belonging condition for capital allowances on machinery and plant

Expensive cars

Computation

Hire purchase by finance lessors

Sale and finance leaseback

Extension to non-traders

Sale and leaseback by novation or new contract

Assets with long build times

Restriction to notional written down value

Subsequent disposals and acquisitions where section 76a(2) applies

Sale and leaseback on defeased terms

(No longer relevant) Prosecutions and the 'Hansard' procedure the consequences of Regina v W and another

Remuneration for employees in shares subject to risk of forfeiture

Previous practice

What has changed?

What are the Inland Revenue going to do about cases affected by this change of view?

Particular situations:

Self assessment years:

Shares have forfeit, tax liability for year of award final

Error or mistake claims

Capital gains tax

Operation of PAYE

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

Reviewing the first year of self assessment: making payments

Statement issue: second payment on account

Making payment

Replacement payslips

Composite payments

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

Tax law rewrite project

Background

Progress in 1997-98

Publications

Plans for 1998-99

(Article deleted since index 2002)

Self Assessment Tax Returns: E mployment pages and tax equalisation - payments on account (POAS)

Interpretations

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

Capital allowances: Notification of expenditure on machinery or plant under Self Assessment for Income Tax cases

Capital allowances: Machinery and plant fixtures - Election to determine disposal value - section 59B CAA 1990 (Article no longer current)

Update of earlier capital allowances articles (Article no longer current)

Glasshouses - issue 5, page 46

Glasshouses - long-life assets - issue 30, page 445

Machinery and plant fixtures - issue 13, page 166

Meaning of "colony" - issue 16, page 208

Enterprise zones: Industrial buildings allowances on partially completed buildings

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

Foreign income dividends and employee benefit trusts

Intra-group interest and similar sums treated as distributions

Does the legislation apply to "upstream loans" - ie, borrowing by a parent from a subsidiary?

Do any of the UK's tax treaties prevent section 209(2)(DA) applying?

Is section 808a ICTA 1988 now redundant?

Why does section 209(8a) apply section 209(8a) apply section 808a for the purposes of section 209(2)(DA)?

Why is the list of matters outlined in section 209(8b) similar to, but differently worded from, the equivalent list in section 808a(2)?

What is the difference between the section 209(2)(DA) relationship referred to in subsection 209(8a)(a) and the relationship referred to in sub-paragraph (b) of the subsection?

Will the Revenue provide illustrations of how the "UK grouping" rules in subsection 209(8d) work?

miscellaneous

Revenue Prosecutions

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

Tax treaty network: update

Recent developments

Hong Kong

Kazakhstan

Kuwait

Lesotho

Oman

Republic of Ireland

Russia

Treaty network overview: 1998-99 programme

Priorities for 1998-99

Year to 31 March 1998

Representations

(Superceded by CA 28600)
Capital Allowances on finance leases:

(No longer relevant)
Prosecutions and the 'Hansard' procedure
the consequences of Regina v W and another

Reviewing the first year of self assessment:
making payments

Self Assessment Tax Returns:
E mployment pages and tax equalisation - payments on account (POAS)

Capital allowances:
Notification of expenditure on machinery or plant under Self
Assessment for Income Tax cases

Capital allowances:
Machinery and plant fixtures -
Election to determine disposal value - section 59B CAA 1990
(Article no longer current)

Update of earlier capital allowances articles
(Article no longer current)

Enterprise zones:
Industrial buildings allowances on partially completed buildings

Tax treaty network:
update

Corporation tax:
case v: relief for underlying tax - section 799 ICTA 1988