Tax Bulletin Issue 40

The new Construction Industry Scheme (CIS) starts on 1 August 1999. This article is the first of two which are intended to address some of the issues that are currently being raised.

CARD OR CERTIFICATE

All subcontractors working within the construction industry must obtain either a registration card or a tax certificate in order to be paid by a contractor on or after 1 August 1999. Most subcontractors will be issued with a registration card (CIS4) and receive payment after a deduction on account of tax and National Insurance contributions (NIC). It is very important therefore, that those subcontractors who currently receive payment without deduction but who do not expect to be able to qualify for a tax certificate, should ensure that all their tax and NICs payments are up to date by 31 July 1999. In most cases they will need to save enough money from current earnings to meet the second payment on account of the 1998-99 liability on 31 July 1999. Failure to do this will result in them having to settle arrears out of taxed income from 1 August 1999 onwards.

CIS5 CERTIFICATES

A Subcontractors Tax Certificate (CIS6) will be issued to those individuals, partnerships and some companies that meet the criteria for a tax certificate. Companies may want to apply for a CIS5 certificate. A Construction Certificate, CIS5 (the old 714C), can be issued to companies that either qualify automatically, or where a company can show, by way of a "business case" (see below) that operating with the normal company certificate (CIS6) would cause substantial difficulties.

AUTOMATIC QUALIFICATION

The following cases qualify automatically:
a public company listed on the Stock Exchange or a 51 per cent subsidiary of such a company;
a company with an annual turnover of at least £5 million (a company with a total gross turnover of £5m or more, evidenced by its accounts, would be assumed to have an administrative need of a CIS5);
where it is clear that the applicant company, even if new, has taken over and will continue on a permanent basis any concern with a turnover of £5m or more which previously was owned by one or more directors of the applicant company and which, under that direction, was long-established and met its tax obligations satisfactorily and on time; AND all the directors and beneficial shareholders (other than holders of negligible interests) can satisfy the conditions in Section 562, Income and Corporation Taxes Act (ICTA) 1988.
a company which is a 51 per cent subsidiary, or an associate within the meaning of Section 13(4) ICTA 1988, of an established company which already holds a CIS5/714C Certificate and would still qualify for a CIS5 Certificate if it applied at the time of the subsidiary's or associate's application.

BUSINESS CASE

The following cases qualify under the "business case" test:

a company which generates or would generate a high volume of vouchers a year. High volume means at least 300 per year, unless the applicant company can show that it does a substantial amount of work for contractors which prefer vouchers per month rather than per payment, when 150 per year would be accepted as a 'high volume'. By vouchers we mean the company's own 715 vouchers -- it is not relevant that the company may also hire subcontractors who generate a high volume of vouchers. The applicant should state the number of vouchers shown by the company's records over the last twelve months. If the applicant company is a current 714C holder, it should demonstrate how many vouchers it would have needed to submit to contractors to cover the payments it received in the last year if it had been a 714P holder;
a company which can demonstrate that its certificate presentation necessitates frequent or long journeys. This means that a director has had to spend a total of at least 200 hours over the last three years, or 100 hours in any one year in the last three years on travel to present the certificate. The emphasis is on travel solely for the purpose of certificate presentation, not on the company's construction activities. It is not relevant that the company may carry out work all over the country. The business should record the following evidence over the period chosen by the applicant:
- The date on which sight of the certificate or certifying document was actually requested by contractors.
- The name of the person and job title to whom it was shown or sent.
- The address at which it was shown or to which it was posted.
- If the certificate was a CIS6/714P and presented in person, the time actually taken travelling to the place concerned, finding the appropriate person, completing any necessary paperwork and returning.
If the certificate was a CIS5/714C and the certificate or certifying document was sent, the estimated time a return trip to that address would take in office hours.
a company which can provide historical proof of a commercial need for a CIS5 certificate on the basis of its work for certain contractors. The company may be able to show that its trade has been built largely on contracts with certain contractors and that those contractors demanded a CIS5/714C before hiring them, so that the loss of a CIS5/714C now would mean a substantial reduction in turnover. The evidence would be that payments by those contractors make up a large proportion of their turnover, and that those contractors would not hire CIS6/714P holders for that type of work. The business case should cover the last 12 months and name the contractors which are said to have hired only CIS5/714C holders, state projects or contracts with the named contractors, and state the type of work and the dates. It should also state the total amount of payments by those contractors, and the total payments for construction work made to the applicant in that period.
a company which can provide proof of a commercial need for a CIS5 Certificate on the basis of potential work for certain contractors which it believes demand a CIS5 for certain types of work, and can show that although it has no record of working for those contractors in the past, it now has a firm chance of working for them. The company should identify the contractors it wishes to work for and the type of work it would do, and attach evidence that the contractor was seriously considering the applicant for a contract, for example, copies of relevant correspondence with the contractors in question.

Anyone requiring further information should contact their tax office for a copy of the full CIS Manual guidance on this subject, which is available free of charge.

!This article is no longer current (Deleted Index 2002)

INTERACTION OF TAX LAW AND ACCOUNTANCY PRACTICE:
RECENT DEVELOPMENTS

This note covers:

the new Accounting Standard on provisions, Financial Reporting Standard ('FRS') 12;
the new Accounting Standard on goodwill and intangible assets, FRS 10;
developments on the Financial Reporting Standard for Small Entities ('FRSSE');
the recent tax case, Herbert Smith v Honour.

All of these have implications for Schedule D Case I and II profits; FRS 12 in particular is of major importance.

This note was originally drafted mainly for the guidance of Inspectors but we are happy to publish it to a wider audience.

This note is written on the basis of the Revenue's understanding of current accounting practice at the time of writing. Except in the discussion of the Herbert Smith case, and elsewhere where tax treatment is specifically mentioned, it is not intended to indicate the Revenue's views of tax law, nor to set out Revenue practice. Nor is it intended as an authoritative guide to accountancy practice; if correct accountancy practice is an issue in a tax appeal it will normally have to be determined by expert evidence.

This note applies to unincorporated businesses as well as to companies. In particular a business, which if it were a company would satisfy the conditions in UK company law for being a 'small' company, is entitled in computing its profits for tax purposes to apply the FRSSE as if it were a company.

FRS 12 'PROVISIONS, CONTINGENT LIABILITIES AND CONTINGENT ASSETS'

FRS 12 was issued by the Accounting Standards Board ('ASB') in September 1998 and is mandatory for accounting periods ending on or after 23 March 1999. No date has yet been announced at which its provisions will become mandatory for businesses which are entitled to, and do, adopt the FRSSE (see 'Updating the FRSSE', below); this is likely to be only a matter of time.

FRS 12 had its origin in the ASB's concern that businesses were making large provisions for future restructuring/reorganisation (called 'big bath' provisions since everything was thrown into them) where in many cases the only event that had occurred at the balance sheet date was an unpublished decision of the directors. However, FRS 12 goes much wider than restructuring provisions; its basis is that provisions must satisfy the definition of liabilities: 'obligations of an entity to transfer economic benefits as a result of past transactions or events'. Mere anticipation of future expenditure, however probable and no matter how detailed the estimates, is not enough, in the absence of an obligation at the balance sheet date.

FRS 12 lays down a complete code prescribing when provisions must be made, and when they must not, and also lays down rules for the quantification of provisions. Where businesses have made, or not made, provisions in the past on a basis which does not accord with FRS 12 they will need to change their accounting policies. This is likely to affect a substantial number of businesses. The tax consequences of changes of accounting policies are dealt with in an article in the February 1999 Tax Bulletin.

This note can only be a brief summary of FRS 12. Although it will be included in the annual collected volume of Accounting Standards this will not be until this summer. Until then you can buy a copy for £8 (post free) from:

ASB Publications

PO Box 939

Central Milton Keynes

Milton Keynes

MK9 2HT

Tel: 01908 230344

'Provisions' are defined by FRS 12 as 'liabilities of uncertain timing or amount'. FRS 12 does not apply to:

'trade creditors', which are defined as 'liabilities to pay for goods or services that have been received or supplied and have been invoiced or formally agreed with the supplier';
'accruals', which are defined as 'liabilities to pay for goods or services that have been received or supplied but have not been paid, invoiced or formally agreed with the supplier, including amounts due to employees (for example, amounts related to accrued holiday pay)';
adjustments to the carrying value of assets such as stock 'provisions', bad debt 'provisions' and 'provisions' for depreciation;
insurance company provisions arising from contracts with policyholders;
provisions which are specifically addressed by other Accounting Standards, such as:
- losses on long-term contracts (Statement of Standard Accounting Practice ('SSAP') 9);
- provisions relating to leases (SSAP 21) other than operating leases that have become 'onerous' (see below);
- pension costs (SSAP 24).

There are other exceptions which are not relevant for tax purposes.

A provision must be made when, and only when, at the balance sheet date:

a business has a present obligation (legal or constructive) as a result of a past event,
it is probable that a 'transfer of economic benefits' (i.e. expenditure) will be required to settle the obligation, and
a reliable estimate can be made of the amount of the obligation.

In practice it is the first two conditions that are of most importance, since the ASB considers that it will be 'extremely rare' for it to be impossible to make a reliable estimate if the first two conditions are satisfied.

The key to FRS 12, and what distinguishes it from earlier Accounting Standards, is the concept of 'present obligation as a result of a past event' (referred to in FRS 12 as an 'obligating event'). An obligating event has occurred only if the business has 'no realistic alternative' to settling the obligation created by the event. An obligation always involves another party to whom the obligation is owed. FRS 12 contains a number of examples designed to show when an obligating event has occurred and when it has not.

For tax purposes the most important consequences of FRS 12 are:

provisions for future repairs and overhauls of plant and machinery (i.e. provisions of the sort that were in issue in Johnston v Britannia Airways Ltd, 67 TC 99) are not permitted (except where an asset is held under an operating lease which contains a repairing obligation);
provisions for future restructuring or reorganisation are permitted only where at the balance sheet date the business has a 'detailed formal plan' for the restructuring and has raised a 'valid expectation' among those affected (e.g. employees and/or customers) that it will carry out the restructuring, either by starting to implement the plan or by announcing its main features to those affected by it;
provisions cannot be made for future expenditure required by legislation where the business could avoid the obligation by changing its method of operation (for example, by stopping doing whatever is affected by the legislation);
provisions cannot be made for 'future operating losses': for an example of a 'future operating loss' see Meat Traders Ltd v Cushing (1997) SpC 131; at the time the provision was made in that case it was acceptable accounting, but where FRS 12 applies it would no longer be acceptable;
a provision must be made where an existing contract becomes 'onerous', for example, where a business vacates property held under a lease, but the obligation to pay rent continues and the lease cannot be surrendered or assigned (this is a change from previous practice where as a general rule 'rent provisions', although often best practice, were not mandatory). Whether such a provision is permitted by tax law depends on the final outcome of Herbert Smith v Honour (see below).

FRS 15 'Tangible fixed assets' was issued in February 1999 and is mandatory (except for businesses which are entitled to, and do, adopt the FRSSE) for accounting periods ending on or after 23 March 2000. As a result there are likely to be further changes to the way in which expenditure on tangible fixed assets, such as overhauls of plant and machinery, is dealt with in accounts. This will probably result in expenditure on overhauls being spread over a number of years more often than it is now. However, because FRS 12 prohibits provisions for future overhauls this spreading will have to be achieved by:

initial depreciation of the part of the asset that needs regular overhaul to reflect that need, followed by;
debiting the overhaul expenditure in the balance sheet, followed by;
amortising that expenditure over a number of years after the overhaul has been carried out.

We will give more guidance on this in due course.

FRS 12 also has important consequences for revenue 'decommissioning provisions' made (for example) by companies in the nuclear, oil and mining sectors.

Where it is not probable that there will be a 'transfer of economic benefits' then a provision must not be made, although it may be that a 'contingent liability' should be disclosed in a note to the accounts. As usual SSAP 17 'Post balance sheet events' applies, so in deciding what is 'probable' in relation to assets and liabilities in existence at the year end the directors or business proprietors should have regard to the information available to them at the time they prepare the accounts. In appropriate cases (for example, in considering whether it is probable that a court case will give rise to liability) they should take professional advice.

On quantification FRS 12 requires provisions to be a 'best estimate', again having regard to the information on assets and liabilities in existence at the year end available to the directors or business proprietors at the time they prepare the accounts. More importantly FRS 12 requires provisions to be discounted 'where the effect of the time value of money is material'. This will clearly be so for many long-term liabilities such as the cost of decommissioning nuclear power stations, but the effect of the time value of money may be material for provisions for shorter terms, in which case they too should be discounted. We do not consider there is any rule of tax law which would permit a provision to be brought to account for tax purposes without a discount where the figure in the accounts has been, or ought to be, discounted in accordance with FRS 12.

However as 'materiality' is an accountancy concept, and one on which different accountants might take different views, whether a provision should be discounted will normally depend on the opinion of accountants. FRS 12 gives guidance on the rate of discount and on the way in which the 'unwinding' of the discount (that is, the way in which the provision builds up from its discounted value to the eventual cash liability) should be recognised in accounts. For tax purposes the 'unwinding' of the discount should be treated as a further provision; in particular it is not a financial item within the scope of the 'loan relationship' legislation in FA 1996.

FRS 12 supersedes SSAP 18 'Contingencies'. FRS 12 distinguishes between 'provisions' which are liabilities that must be recognised and 'contingent liabilities' which must not be recognised but may be disclosed in a note to the accounts. Broadly speaking 'contingent liabilities' arise from events where it is possible but not probable that there will be a 'transfer of economic benefits' and from the 'extremely rare' case where a reliable estimate of the liability is not possible. 'Contingent assets' must not be recognised; this is similar to the rule in SSAP 18 which prohibited recognition of 'contingent gains'.

What consequences does all this have for tax purposes? Our view continues to be that a provision will be allowable for tax purposes if, and only if all the following conditions are met:

the expenditure for which it provides is admissible for tax purposes (e.g. revenue and not capital);
the making of the provision accords with UK generally accepted accounting practice ('GAAP');
the provision is a sufficiently accurate estimate of the liability;
the making of the provision does not cause a loss to be anticipated or violate any other rule of tax law (the scope of the non-anticipation principle depends on the final outcome of Herbert Smith v Honour, discussed below);
the timing of the expenditure is not prescribed by statute (e.g. contributions to exempt approved pension schemes).

FRS 12 does not change our view of tax law, but it clearly changes UK GAAP. In particular many provisions which formerly accorded with UK GAAP will no longer do so. It follows that those provisions, even if they were formerly allowable for tax purposes, will no longer be so. In our view there is no rule of tax law which permits provisions made on a now superseded basis to be 'run off' on that basis for tax purposes when the accounts now adopt a new basis. This is discussed further in the February 1999 Tax Bulletin article referred to above.

FRS 12 has novel features for accountants as much as for tax practitioners. Because of this it is likely that in the first few years of its existence there will be real doubts over its effect.

On quantification the 'best estimate' test of FRS 12 could well be the same as the 'sufficiently accurate estimate' test of tax law. However it remains to be seen whether the adoption of FRS 12 causes a general tightening-up of the level of accuracy of provisions in accounts; it is arguable that 'best estimate' is already implicit in UK GAAP. In our view the Courts are still perfectly entitled to consider the factual accuracy of provisions, by reference to both the FRS 12 test and the tax law test.

FRS 10 'GOODWILL AND INTANGIBLE ASSETS'

FRS 10, issued in December 1997, is mandatory for accounting periods ending on or after 23 December 1998. For businesses which are entitled to, and do, adopt the FRSSE broadly similar provisions (with some simplification) are mandatory for accounting periods ending on or after 23 March 1999.

FRS 10, prescribes a new code for the treatment of purchased goodwill and intangible assets, which by and large ensures that they appear in the balance sheet rather than being written off directly to reserves. The treatment of internally created goodwill and intangibles is generally unaffected; FRS 10 continues to prohibit the recognition of these in the balance sheet (there is an exception for a very limited class of internally created intangibles; this is likely to be rare in practice).

The significance of this for tax purposes is limited. Some expenditure affected by FRS 10 is capital expenditure for tax purposes, so that the accounting treatment does not affect the tax treatment. For example, when a business is acquired a payment for the goodwill of the business is capital expenditure, and no income tax relief is available. Similarly payments to purchase trademarks or patents are often capital expenditure (and capital allowances may be available for payments to purchase patents). (A Revenue technical note published on 10 March 1999 considered whether a reform of intellectual property in 2000 might affect the capital-revenue distinction.)

On the other hand some payments for intangible assets may be revenue expenditure. A common example is transfer fees for football players, which are payments for the intangible asset of the rights to the service of an employee. It would be hard to argue that rights to the service of an employee are on capital account. Another example is payments to purchase copyright which, because of the wasting nature of copyright, are often revenue expenditure.

FRS 10 requires expenditure on purchased goodwill and intangible assets to be written off over the expected useful economic life of the asset. For many businesses this will require a change of accounting policy. The expected useful economic life of the asset will normally not exceed 20 years, but there are special provisions which permit a business to write off an asset over more than 20 years, or to keep it in its balance sheet without writing it off at all, subject to certain strict tests.

For example, most football clubs used to write off transfer fees as incurred; they will now be required to write them off (generally) over the term of the player's contract. The 'unexpired' part of previous transfer fees will have to be brought back onto the balance sheet, with an appropriate prior year adjustment. This adjustment is taxable under current law for the reasons set out in the February 1999 Tax Bulletin article but the Budget contains proposals which 'grandfather' the past treatment of expenditure on players held before Budget day.

We do not consider that there is anything in FRS 10 which offends against a rule of tax law. Accordingly, where revenue expenditure is written off over several years in accordance with FRS 10 there is no rule of tax law which entitles the business to deduct the whole amount up front for tax purposes. The tax treatment should follow the accounts treatment.

THE FRSSE

There are two issues arising from the FRSSE which have consequences for tax purposes.

Updating the FRSSE

Because the FRSSE is self-contained it is not automatically updated when new Accounting Standards are issued. Instead the FRSSE is reviewed from time to time and revised to incorporate those parts of new Accounting Standards that are thought appropriate to small businesses. There may therefore be a time-lag before new Accounting Standards apply to businesses that are entitled to, and do, adopt the FRSSE.

This happened most recently in December 1998; the revision is mandatory for accounting periods ending on or after 23 March 1999. The important revision for tax purposes is that FRS 10, with some simplification, was incorporated in the FRSSE. However FRS 12 was not incorporated in the FRSSE because it had not been issued when the draft revision was issued for consultation. It is likely that elements of FRS 12 will be incorporated in the next revision, which will be issued towards the end of 1999 or shortly thereafter.

Issues not addressed by the FRSSE

An area of more long-term concern is issues that are not addressed by the FRSSE. This is not an easy area to deal with, and the opinion of accountants will normally be relevant.

Smaller entities applying the FRSSE are exempt from all other Accounting Standards and UITF Abstracts and therefore there is no explicit requirement to apply them. However, paragraph 2.1 of the FRSSE says that financial statements to which the FRSSE applies are required to show a true and fair view, and to achieve such a view regard should be had to the substance of any arrangement or transaction into which the business has entered. In addition, the introductory 'Status of the FRSSE' section of the FRSSE says that financial statements will generally be prepared using accepted practice and accordingly, for transactions and events not dealt with in the FRSSE, businesses should have regard to other Accounting Standards and UITF Abstracts, 'not as mandatory documents, but as a means of establishing current practice'.

It would therefore be wrong to say that other Accounting Standards and/or UITF Abstracts must apply if there is no guidance in the FRSSE. However, it would be equally wrong to disregard that evidence when considering the substance of the transaction or event in order to determine the appropriate treatment for a true and fair view. Generally, the principles in the exempt standards and extracts are the same as those in the FRSSE. However, the exemption from the specific Standard and/or Abstract gives entities the latitude to apply a simpler approach, presentation and/or disclosures, where appropriate.

A specific example is the treatment of employee share ownership trusts (ESOTs). This is dealt with in UITF Abstract 13, from which companies applying the FRSSE are exempt, and is not covered by the FRSSE. The question then is whether a company which is entitled to, and does, adopt the FRSSE should treat the assets and liabilities of its ESOT as its own. Where the company has control of the shares held by its ESOT and bears their benefits or risks, the substance of the transaction is that the assets and liabilities of the ESOT would be treated as the entity's own. This would lead to a treatment that was consistent with UITF Abstract 13. These issues are relevant in deciding when the entity can have a tax deduction for contributions to the trust: this was discussed in the Tax Bulletin Issue 27 (page 399, February 1997).

HERBERT SMITH V HONOUR

This case, decided in the High Court on 12 February and reported at [1999] STC 173, is likely to be a leading case on the interaction between tax law and accountancy practice. The facts were that the taxpayers, a large firm of solicitors, decided in Autumn 1989 to rationalise their four London offices into a single one. Accordingly in January 1990 they took a lease of new premises and, during 1990, vacated their four existing offices. Two of those offices were held under leases which were not capable of being terminated.

The firm's accounts for the year ended 30 April 1990 were drawn up to give a true and fair view of the state of affairs of the firm at 30 April 1990, and of its profit and source and application of funds for the year then ended, and were audited. In those accounts the firm made a provision of some £5.5 million for the expected loss on the two leases (in the case of one of them, the expected loss only up to the period of the next rent review). Although this was disputed the judge held that on the evidence the only conclusion open to the Commissioners was that the making of the provision was the only accounting treatment which would have given a true and fair view.

The Revenue argued that there was a rule of tax law that neither a profit nor a loss could be anticipated, and that this overrode UK GAAP if the application of GAAP resulted in a profit or a loss being anticipated. The judge held that:

in this case it was not open to the Revenue to replace a treatment which accorded with GAAP, and indeed was the only treatment which so accorded, by one that did not;
there was no general rule of tax law which prohibited provisions made on the grounds of prudence where the making of the provision was required by GAAP.

The judge accepted, as had the taxpayers, that provisions were vulnerable to challenge under tax law if the making of the provision was inconsistent with the true facts, or if the provision was not estimated with sufficient accuracy. By the time the case reached the High Court it was common ground that neither of these prohibitions applied.

The Revenue have appealed against the decision; the hearing before the Court of Appeal will be some time in 2000. We will comment on the implications of the case once the appeal has been finally determined.

(Superseded by BIM41145)

TAXATION OF 'REVERSE PREMIUMS'

This article is about the taxation of sums paid by landlords to prospective tenants of property as an inducement to enter into a lease. Such payments are commonly called 'reverse premiums'.

The Chancellor announced on Budget Day, 9 March 1999, that the Finance Bill would include provisions to tax reverse premiums as revenue receipts. The legislation will apply to reverse premiums received under agreements entered into on or after 9 March 1999. We have been asked for our view as to the tax treatment of reverse premiums under earlier agreements.

There have in the past been no specific provisions governing the tax treatment of reverse premiums, so the correct treatment depends on general principles, and in particular the principles developed by the Courts for distinguishing between capital receipts and revenue receipts. The most recent case of relevance, Commissioner of Inland Revenue v Wattie, was a New Zealand case decided in December 1998 by the Judicial Committee of the Privy Council.

In that case the Privy Council held that a reverse premium was a capital receipt even though the facts established that it was 'commercially, financially and mathematically' linked to an increased rental payable by the tenant.

In the past the Revenue have considered that the linkage of a reverse premium to an increased rental may give it the character of a revenue receipt. Although Privy Council decisions are only of persuasive authority in the UK (that is, they are not of binding authority) we will be guided by the decision. Accordingly we will accept that the linkage of a reverse premium to an increased rental does not give it the character of a revenue receipt. We will also accept that the increased rental retains its revenue character despite such a linkage, in other words the increase does not represent the repayment of a capital sum.

A reverse premium (not covered by the new legislation) may still be a revenue receipt to the extent that the evidence shows that it is in fact a contribution to revenue expenditure such as relocation costs. And if the evidence shows that it is in fact a contribution to capital expenditure such as the cost of fixtures and fittings then the expenditure qualifying for capital allowances may have to be reduced accordingly by virtue of Section 153 CAA 1990.

Where a reverse premium (not covered by the new legislation) is a capital receipt it will only give rise to a chargeable gain where it is derived from an asset held by the tenant. If it was paid before the tenant has entered into the lease it will only give rise to a chargeable gain if it is derived from some other asset held by the tenant, for example if it is a payment to induce the tenant to surrender an existing lease.

(Superseded by BIM64170 onwards)

PRIVATE FINANCE INITIATIVE (PFI) PROJECTS:
TREATMENT OF SURPLUS LAND

INTRODUCTION

One of the ways in which the public sector can arrange for such things as schools, hospitals or prisons to be built or refurbished and serviced, is by entering into a PFI project. These projects often involve a private sector company (or companies) agreeing to design, build or renovate and operate a property in order to provide accommodation and related services to agreed standards, in return for annual service charges (the unitary charges). The contracts are for quite lengthy periods, typically 25-30 years.

The legal contracts which underlie such projects are invariably complex, involve large amounts and are often commercially sensitive. The projects frequently give rise to novel and difficult tax issues which have to be resolved within very tight time constraints. In recognition of these difficulties and the importance of the Private Finance Initiative, a working group has been set up to consider the tax aspects of PFI, consisting of representatives from the various parties advising the private sector, a Treasury official and Inland Revenue Head Office technical specialists. The intention of the group is to identify points and issues specific to PFI which have caused particular difficulty, with the aim, where possible, of publishing articles which clarify the position.

This article, the first arising from those discussions, considers the correct treatment for tax purposes where surplus land (or cash) is introduced by the public sector body.

BACKGROUND -- ACCOUNTING TREATMENT

The following three paragraphs contain a brief review of the relevant accounting treatment, which it is hoped readers will find of use as an overview, before looking at the issues in detail.

The Accounting Standards Board issued "Amendment to FRS5 'Reporting the substance of transactions': Private Finance Initiative and similar contracts" in September 1998, which gives guidance on the accounting treatment to be used when dealing with PFI contracts. The amendment, which inserts "Application Note F" into FRS5, refers to the entity which acquires the services, (e.g. an NHS trust) as the "purchaser", and the entity which supplies the services under the PFI contract to, for example the NHS trust, as the "operator"; the same terminology is used in this article.

The accounting by the operator is governed by Application Note F to FRS5 and the application of FRS5 involves those that prepare and audit financial statements taking a view on the substance of transactions, so that their commercial effects are properly reflected therein. In general, this involves taking a view on whether the property used in providing PFI contracted services is on or off balance sheet. In general, the operator has an interest in the property (e.g. a lease) and in most PFI schemes, significant risk rests with, or is transferred to, the operator. In such circumstances, the property is shown under FRS5 as the physical asset of the operator. However, if the degree of risk transfer is low, the property may be on the balance sheet of the public sector purchaser. In such circumstances, the transaction is often termed "off balance sheet to the operator", but more accurately, what this means is that the operator is viewed for accounting purposes as having a financial asset, reflected in its accounts as a debt due from the purchaser (similar to a finance lease receivable), rather than a physical asset of the property.

In simple terms, if the property is off balance sheet to the operator, it is likely to be on the balance sheet of the purchaser. However, the accounting analysis by the public sector is carried out under Treasury Guidance rather than FRS5 and so it is possible that there will be other outcomes -- the physical asset could be on either both or neither balance sheets. This article considers only the position regarding the financial statements of the operator.

Treatment of land introduced into PFI contracts

Public sector organisations will often wish to minimise the annual service charge (the unitary charge) to be paid for the supply of services procured under a PFI contract, and where the purchaser has land surplus to its own requirements, it may decide to introduce that land into the PFI contract, in order to reduce the unitary charge.

The purchaser and the operator will generally determine the price of the unitary charge on the basis of a discounted cash flow model, which is produced by using a set of assumptions negotiated by the parties. The introduction of land as a contribution towards the project costs (in order to reduce the unitary charge), and the timing of the realisation of the value of the land, will have an impact on the cash flow of the operator and, therefore, on the price to be charged to the purchaser. The value of the land for tax purposes will be the price agreed between the parties which is specified in the documentation, being in accordance with the facts and intentions of the parties.

As has been previously stated, PFI transactions are by their very nature complex. When considering the correct tax treatment where surplus land of the purchaser is introduced into a particular contract, the terms of the relevant documentation, providing this accords with the facts, will be an important indicator. Another important indicator will also be the purpose of the payment from the point of view of the purchaser (as opposed to the purpose of the receipt from the operator's perspective) as evidenced by the documentation itself. Typically, we have found that land is introduced into a PFI project by the purchaser, in one of the following ways:

the purchaser has land surplus to its requirements and introduces that land as a payment (in money's worth) on account of future unitary receipts;
the purchaser has previously identified land which is surplus to its requirements, has entered into an agreement for the disposal of that land to a developer and arranges for all or part of the proceeds to be paid direct by the developer to the operator as a payment on account of future unitary receipts;
land is introduced by the purchaser as a payment in money's worth in order to reduce the capital cost of the project to the operator;
the proceeds arising from the disposal of land are introduced by the purchaser in order to reduce the capital cost of the project to the operator.

The following examples consider the accounting and tax treatments to be applied in straightforward circumstances.

EXAMPLE 1

An NHS trust (the purchaser) enters into a PFI contract with an operator and has identified surplus land with a current market value of £10 million -- assumed to be the fair value for accounting purposes -- which it wishes to be introduced as a payment on account of future unitary receipts, and the documentation makes this clear.

Accounting Treatment

Under FRS5, the accounting treatment will follow the substance of the transaction and (assuming initially that the physical asset -- the hospital -- is on the balance sheet of the operator) the total capital cost of the project will be debited to fixed assets in the operator's balance sheet and depreciated in the normal way. The contribution of land is, therefore, recorded by the operator as an asset at its fair value of £10m (as part of project assets or separately from them according to whether the land is used in the project). The credit entry is to "deferred income". (The contribution has to be recorded as "deferred income" rather than being used to reduce the project cost because of certain accounting rules in the Companies Act 1985.) The "deferred income" is released to profit and loss account over the period to which the contribution relates. In general this would be the whole of the contract period.

Alternatively, where the hospital is off the operator's balance sheet -- the operator, therefore, has a financial asset -- the Companies Act rules referred to above do not apply. The operator will set up a financial asset equal to the total amount of its investment. The operator would treat receipts from the purchaser as being partly interest and finance charges earned and partly collection of principal and the fair value of a contribution (i.e. the £10 million) would be treated in much the same way -- credited to the financial asset -- and would, therefore, affect the pattern in which interest is earned on the amount of the principal that is outstanding from time to time.

Tax Treatment

Although the accounting treatment under FRS5 is an important consideration for tax purposes, particularly when determining the time at which receipts are to be taxed, it cannot determine whether the relevant item falls to be treated as income or capital. Here, the documentation (being in accordance with the facts and the intentions of both parties) shows that the introduction of the land is to reduce the future payments made by the purchaser to the operator and is, in effect, a prepayment of the unitary charge. The release of the contribution to the operator's profit and loss account will be chargeable to tax as income of the operator's trade and it is likely that the timing of the income for taxation purposes will follow the accounts treatment. Where the land is not immediately sold then its market value at the date of signing the PFI contract will be taken as the value of the prepayment of the unitary charge for tax purposes. If the land is subsequently appropriated to capital account (as an investment or for some other purpose), the market value of the land at the date of appropriation will be taken to establish whether any further adjustment is required for tax purposes of the operator (see Example 6, Tax Treatment, (a)) to reflect any profit or loss arising whilst in the operator's ownership to the date of appropriation.

EXAMPLE 2

An NHS trust introduces land valued at £10m into a PFI contract, to be used as a contribution to the construction costs and the documentation makes this clear.

Accounting Treatment

The accounting treatment is no different to that in Example 1 above, irrespective of how the land or cash proceeds are to be utilised.

Taxation Treatment

As previously stated, whilst the accounting treatment is useful, it cannot determine the correct tax treatment. As with Example 1, providing the documentation reflects the facts and intentions of both parties, the tax treatment will accord with it and the contribution will fall to be treated as a contribution towards the capital costs of construction. Once that has been so established:

a. the operator is treated as having received a capital contribution resulting in a reduction in the base cost of the asset e.g. the hospital for capital gains tax purposes, in accordance with Section 50 Taxation of Chargeable Gains Act 1992 (TCGA 1992). The Revenue considers that where exceptionally the grant is not from a body listed in Section 50 TCGA 1992, a reduction in the base cost of the asset is still required for tax purposes, since it is considered that the operator has not incurred the expenditure for the purposes of Section 38 TCGA 1992.

b. if the agreement specifies the costs to be met by the contribution, this will be followed when deciding whether any reduction in expenditure qualifying for capital allowances is required under Section 153 Capital Allowances Act 1990 unless, exceptionally, the facts require a different approach.

c. if there is a partial contribution -- for example, towards the cost of a building with many different elements -- then the grant will be apportioned across the various categories of expenditure (e.g. buildings, plant etc.) unless the parties have agreed how the contribution is to be allocated in which case that allocation will be followed unless the facts dictate otherwise.

Any allocation of the contribution must, as has been previously emphasised, be consistent with the facts and, for example, no contribution can exceed the amount of the capital expenditure to which it is allocated. If there is an excess, then the excess has to be reallocated over other categories and in these circumstances, the Revenue will pay particular attention to the facts to see whether the excess should correctly be treated as a prepayment of the unitary charge. However, an excess of contributions over related costs would only occur if the expenditure incurred was less than the amount of the contribution taken over the project life. For example, consider a project where a contribution of £5 million was to be made towards assets which did not qualify for capital allowances. If in the first year only £1 million was spent but by the end of the construction, £6 million had been spent on non-qualifying assets, there would be no need for a reallocation. If, however, by the time the construction was completed only £3 million had been spent on non-qualifying assets, then the remaining £2 million would be allocated over the remaining categories of expenditure.

EXAMPLE 3

An NHS trust has previously realised proceeds from the disposal of surplus land and wishes to contribute all or part of those proceeds to the PFI operator, as a payment on account of future unitary receipts and the documentation makes this clear.

Accounting and Tax Treatments

The accounting and tax treatments will be exactly the same as in Example 1, reflecting the reality of the situation that cash has effectively passed from the purchaser to the operator on day 1 of the contract in order to be spread over the period of the contract reducing the purchaser's future annual unitary charge payments.

EXAMPLE 4

An NHS trust has previously realised proceeds from the disposal of surplus land and wishes to contribute all or part of those proceeds to the PFI operator, as a contribution to the construction costs of the project and the documentation makes this clear.

Accounting and Tax Treatments

The accounting and tax treatments will be exactly the same as in Example 2.

EXAMPLE 5

An NHS trust enters into a PFI contract with an operator and has identified surplus land with a current market value of £10 million -- assumed to be the fair value for accounting purposes -- (or previously realised proceeds of £10 million from the disposal of surplus land) and wishes to contribute all or part of those proceeds to the PFI operator. The documentation is silent on how the land (or proceeds) are to be used.

Accounting and Tax Treatments

In such cases, particular care needs to be taken to ensure both the tax and accounting treatments reflect the facts of the case. However, if the documentation is silent then the taxation treatment would normally follow the accounting treatment, producing the same result as in Example 1.

EXAMPLE 6

A purchaser wishes to contribute land to a PFI project involving the construction of a property on a new site (site A), agreeing that once the building on the new site can be occupied, the old site (site B) will be vacated with title passing to the operator. The operator takes title to site B at the end of the construction phase and sells it at some later point. The calculation of the unitary charge assumes a sale of site B for £10 million with the value to be used either:

(i) as a reduction in the unitary charge, or

(ii) to fund the construction costs.

Accounting Treatment

The accounting treatment is identical to the previous example irrespective of how the proceeds from the sale of Site B are to be utilised, i.e. when site B is contributed, it is recorded as Dr land, Cr deferred income, which is released into income over a period in accordance with the principles set out above.

The operator would subsequently also have to monitor the carrying value of site B for possible impairment, if classified as trading stock, under SSAP 9 "Stocks and long term contracts", and if as a fixed asset, under FRS11 "Impairment of Fixed Assets." In accordance with those accounting standards, any loss on an asset is required to be recognised when the loss is known, with recoveries of value also being recorded, and hence the carrying value of the site may fluctuate until disposal when its value can be determined. (Assets classified as "investment properties", however, are treated differently, in accordance with SSAP 19.)

If the operator's accounts showed it carrying a financial asset rather than a physical asset, as in the first example, the value attributed to site B would be taken to reduce the carrying value of the financial asset, i.e. Dr land, Cr financial asset.

Tax Treatment

It is particularly important in this type of situation to establish precisely what has happened and especially the purpose of the payment (from the purchaser's point of view), since this will be an important indication in determining the tax treatment, which is likely to follow that in Examples 1 and 2, subject to the following.

Additional consideration may be needed where the land is retained for a period of time, which may result in eventual disposal proceeds which are different from the value (of the land) introduced into the PFI contract. For example, it may not be possible for the land to be sold immediately, or there could be delays in gaining vacant possession or the land may only become available at a much later date for other reasons. In such circumstances:

a. where the land is (eventually) sold, say at a profit, it will be necessary to establish whether that profit is to be returned to the purchaser (with no additional tax consequences) or whether the operator can retain all or part of that profit. In these circumstances, it will normally be the case that the profit will be taxed under Schedule D Case I. In calculating the "excess profit" the land would be deemed to have a cost equal to its agreed value (£10 million in this case) and the timing of the taxation of these profits will depend upon the particular facts of the case;

b. where the land is sold shortly after the construction works have been completed with the proceeds required to be used to pay for the construction works the taxation treatment will be similar to those set out in Example 2 dealing with an up front capital contribution.

MISCELLANEOUS MATTERS

It should be recognised that the article is based on the most straightforward of situations and is intended to give only general advice -- at the end of the day, the treatment of a particular transaction will always depend upon its own particular facts. It should also be noted that this article does not consider, nor address, any stamp duty or VAT implications.

A MODERN SYSTEM FOR CORPORATION TAX PAYMENTS: QUARTERLY INSTALMENT PAYMENTS AND GROUP PAYMENT ARRANGEMENTS

The 1998 Finance Act ('FA 98') introduced a new way for large companies to pay Corporation Tax -- in quarterly instalments. FA98 also allows the Inland Revenue to enter into arrangements with groups of companies so one company in the group can pay the Corporation Tax liabilities of the others. The changes are part of a wider reform of the Corporation Tax regime, which includes the introduction of Corporation Tax Self Assessment for accounting periods ending on or after 1 July 1999, and the abolition of Advance Corporation Tax on 5 April 1999.

QUARTERLY INSTALMENT PAYMENTS

Around 20,000 large companies will have to start paying their Corporation Tax in four quarterly instalments. The Quarterly Instalment Payment regime will be phased in over four years, starting with accounting periods ending on or after 1 July 1999.

A company is 'large' if, broadly, its profits in an accounting period are more than the Upper Relevant Maximum Amount (URMA) in force at the end of the accounting period so that it pays Corporation Tax at the main rate. At the moment, URMA is set at £1.5 million and the main rate of Corporation Tax -- from 1 April 1999 -- is 30%. (URMA is reduced where a company has associates, or where there are short accounting periods.)

Companies that are not large do not have to pay in instalments, so the overwhelming majority of companies will carry on paying their Corporation Tax nine months and one day after the end of their accounting period, as they do now. And companies with a net tax liability below £5,000 (reduced proportionately for an accounting period of less than 12 months) will not be affected. So companies with small liabilities in large groups will not have to make Quarterly Instalment Payments.

To ensure that growing companies do not unexpectedly find that they have to pay by instalments, and to give them time to prepare for paying, Quarterly Instalment Payments will not have to be paid for an accounting period if the company's taxable profits for that period are less than £10 million (reduced proportionately for an accounting period of less than 12 months) and it was not large in the previous year. Where there are associated companies, that £10 million threshold will be divided by one plus the number of associates at the end of the previous accounting period.

The transition to quarterly instalments

To help companies adapt to the new system, Quarterly Instalment Payments will be phased in over the next four years. So large companies will pay:

60% of their Corporation Tax in instalments for accounting periods ending between 1 July 1999 -- 30 June 2000, and the other 40% nine months and one day after the end of the accounting period;
72% of their tax in instalments for accounting periods ending between 1 July 2000 -- 30 June 2001, and the remaining 28% nine months and one day after the end of the accounting period;
88% of their tax in instalments for accounting periods ending between 1 July 2001 -- 30 June 2002, with the rest nine months and one day after the end of the accounting period, and
100% of their tax in Quarterly Instalment Payments for accounting periods ending on or after 1 July 2002.

When Quarterly Instalment Payments will be due

After the phasing-in period, a large company with a 12 month accounting period will be due to pay its Corporation Tax in four equal instalments. The due dates of payment will be:

six months and 13 days after the start of the accounting period;
then nine months and 13 days;
then twelve months and 13 days, and
finally fifteen months and 13 days after the start of the accounting period.

So, for a company with a 12 month accounting period starting on 1 January, Quarterly Instalment Payments will be due on 14 July, 14 October, 14 January and 14 April.

Where an accounting period lasts less than 12 months, the last instalment will be three months and 14 days from the end of the accounting period and there may be more instalments (up to a maximum of four in all) every three months, starting six months and 13 days from the start of the accounting period. So, for a company with an eight month accounting period starting on 1 January, Quarterly Instalment Payments will be due on 14 July and 14 October, with a final instalment on 14 December.

Deciding whether Quarterly Instalment Payments are due

The onus is on companies to determine whether or not they have to make Quarterly Instalment Payments. As a customer service, we will send a reminder and a payslip to every company whose last return showed profits of more than £1.25 million (reduced proportionately for any associated companies, or if the accounting period was shorter than 12 months) and whose tax liability was over £5,000. We will do this between one or two months before each instalment is due. But because the regime only applies to some 5% of companies in any one year, and the profits of companies are neither fixed nor certain in advance, it may be that a company will not get a reminder or payslip even though it has to pay by instalments.

Remember, it is still the company's responsibility to make Quarterly Instalment Payments if they are due.

The Accounts Offices at Cumbernauld and Shipley will provide payslips if companies ask them to. But they cannot help with general questions about Quarterly Instalment Payments. If a company needs help and advice, it should telephone its own tax office.

Working out Quarterly Instalment Payments

Instalment payments are based on estimates of a company's tax liability for each accounting period (net of reliefs and set offs).

The amount of each instalment is worked out by:

forecasting the tax payable by instalments for the accounting period (CTI);
working out 3 x CTI/n, where n is the number of months in the accounting period;
paying the smaller of that amount and CTI at the first quarterly instalment due date; and
paying the smaller of that amount and the unpaid balance of CTI at each later instalment due date (remembering to revise the forecast and adjust payments accordingly as appropriate).

There are examples of how to calculate Quarterly Instalment Payments in our leaflet, A Modern System for Corporation Tax Payments -- A Guide to Quarterly Instalment Payments (inst1) available free from any tax office or Tax Enquiry Centre.

A company's forecast of its tax liability may go up and down during the Quarterly Instalment Payment period. But the new regime is flexible and companies should make top-up payments if they believe at any stage that not enough tax has been paid in previous instalments. On the other hand, if companies find that they have paid too much, they will normally be able to claim a repayment.

Interest and Penalties

Interest on late paid tax will be calculated only after a company has filed its Company Tax Return (or we have made a determination of its Corporation Tax liability in the absence of a return) and the normal due date (nine months and one day after the end of the accounting period) has passed. The rates which apply during the period up to the normal due date are more favourable to the company than the rates which apply after the normal due date.

Interest receivable by companies will be chargeable to tax; interest paid will be deductible for tax purposes. 'Debit interest' will be charged on underpaid tax, and 'credit interest' will be paid on tax overpaid (or paid early) after the first instalment date has passed and up to the normal due date.

Although companies will be making Quarterly Instalment Payments based on forecasts of liability, by the time of the normal due date they should have a good idea of what their liability will be. (In the case of a 12 month accounting period the third and fourth instalments will be paid after the end of the accounting period.) The normal late payment and repayment interest rates will apply to companies within the Quarterly Instalment Payment regime, as to other companies, from the normal due date.

Under CT Pay and File, groups of companies could surrender overpayments between group members to minimise liability to interest on tax paid late. This will not change. Groups who make Quarterly Instalment Payments will also be able to benefit from Group Payment Arrangements (see below).

As well as interest, a penalty may be charged if a company deliberately or recklessly fails to make adequate instalment payments and where a company fraudulently or negligently makes a claim for repayment. Like interest, a penalty will be charged only after a company has filed its Company Tax Return, or the Inland Revenue have made a determination of its Corporation Tax liability and the normal due date has passed. Guidance on use of the penalty will be published early in the summer.

More information

Apart from the leaflet already mentioned, there is more information about Quarterly Instalment Payments in A Guide to Corporation Tax Self Assessment for Tax Practitioners and Inland Revenue Staff, to be published later this month.

GROUP PAYMENT ARRANGEMENTS

Section 36 FA 1998 gives the Board of Inland Revenue the power to enter into an arrangement with groups of companies under which one company in the group (the 'nominated company') undertakes to pay the Corporation Tax liabilities of all companies in the group which are part of the arrangement (the 'participating companies').

The new facility -- which is voluntary -responds to representations made on the Consultative Document, A Modern System for Corporation Tax Payments (issued in November 1997).

Respondents felt that such a facility would help groups with the switch to Quarterly Instalment Payments by helping groups containing large companies manage any uncertainty over Corporation Tax liabilities in the period between their falling due and the filing by individual companies of their Company Tax Returns.

Group Payment Arrangements apply to accounting periods ending on or after 31 December 1999. So most grouped companies within the Quarterly Instalment Payment regime will be covered by Group Payment Arrangements for their first accounting period under Group Payment Arrangements. The first payment within the arrangements will fall due on 14 July 1999. A minority of groups that have an earlier year-end will not be able to take advantage of Group Payment Arrangements until their second accounting period under Quarterly Instalment Payments.

Groups will still have to pay the right amount of tax at the right time. But the new arrangements mean that, in estimating what is due to be paid, they will be able to forecast at the group rather than the individual company level, and pay on that basis. This means they do not have to worry about dividing up payments between the companies in the group until the closing date (defined below). These arrangements will also mitigate the effect on a group of the differential between interest rates on overpaid and underpaid tax.

Eligible companies

Parent companies, their 51% subsidiaries, and the 51% subsidiaries of those subsidiaries, and so on, are eligible to enter into the Group Payment Arrangements. The group must be reasonably sure, at the time the arrangement is entered into, that at least one of the companies covered by it will be liable to pay Quarterly Instalment Payments. The nominated company must be UK resident, but the other participating companies do not need to be. And UK branches of non-resident companies can also be covered by the arrangement. Not all members of the group need be covered by the Group Payment Arrangement, and a group may apply to set up more than one arrangement for different sub-sets of companies in the group.

We will only be prepared to enter into the arrangement with companies which have filed returns and paid tax due in respect of their last but one accounting period.

Periods covered by arrangements

The arrangement will relate to one or more periods of account of the nominated company, which must last for no more than 12 months. Generally, this period of account will also be the accounting period of all the participating companies. But a company which joins a group will be able to take part in the group's Group Payment Arrangement provided that it aligns its period of account with that of the group. It will not, though, be able to join an existing arrangement after the first tax payable under the arrangement for the period is due. And it cannot be covered by the arrangement in respect of an accounting period which started before the period of account covered by the arrangement.

If a participating company proves to have an accounting period which ends during the period of account covered by the arrangement, it can remain part of the arrangement as long as its accounts are drawn up for the same period as the rest of the group. For example, if a participating company in a group with a 31 December 1999 accounting date stops trading on 31 August (triggering the end of an accounting period) it can remain part of the Group Payment Arrangement as long as its accounts cover the period to 31 December 1999. It will then have two accounting periods within the arrangement, one from 1 January 1999 to 31 August 1999, the second from 1 September 1999 to 31 December 1999.

The arrangement will generally roll forward automatically to subsequent periods of account. The nominated company will have to tell us if there are any changes to the set of participating companies, and if it plans to change its accounting date.

Taking companies out of the arrangements

The nominated company must remove from the Group Payment Arrangement a participating company which ceases to be a member of the group, or which turns out not to have an accounting period aligned with the rest of the group. In cases like this, the nominated company may apportion payments -- or parts of payments -- to the departing company. The nominated company will not retain any liability in respect of the departing company after it has left the arrangement (including in respect of its liability for the accounting period for part of which it was a member of the group).

We will have the right to remove from a Group Payment Arrangement any company which ceases to be a member of the group, or turns out not to have an accounting period aligned with the rest of the group, or turns out never to have been a member of the group. We will also have the right to terminate the arrangement if the nominated company breaches the terms of the agreement, or if any of the companies covered by the arrangement is likely to become liable to tax under the provisions of Section 767A or Section 767AA Income and Corporation Taxes Act (ICTA) 1988 (anti-avoidance legislation concerned with changes in ownership of a company).

Deadline for signing-up

Groups who wish to enter into a Group Payment Arrangement for accounting periods ending on 31 December 1999 should contact us by telephone or fax straight away and we will send full documentation for the group to consider before taking a final decision. We will be entering into arrangements with groups from April 1999. Groups with 31 December 1999 accounting periods will need to deal quickly with the arrangement documentation so that they can get the signed agreement back to us before 15 May 1999.

The arrangement document has been drawn-up with input from the Self Assessment Consultative Committee. Its terms are non-negotiable and will be identical for all Group Payment Arrangements.

A group may register its interest, and get the answers to any questions about Group Payment Arrangements, by contacting the Group Payment Team at the Inland Revenue Accounts Office to which it normally makes its payments. Groups should not contact their local tax offices. The Group Payment Team contact details are as below:

Group Payment Team

Accounts Office Cumbernauld

St Mungo's Road

Cumbernauld

Glasgow

G70 5TR

Telephone: 01236 783488

Fax: 01236 783387

Group Payment Team

Accounts Office Shipley

Victoria Street

Shipley

West Yorkshire

BD98 8AA

Telephone: 01274 539561 Fax: 01274 539669.

The Group Payment Team will need to know:

the name of the group;
a contact point for the group;
the number of Group Payment Arrangements the group is thinking of applying to set up, and
the dates of the first period of account to be covered by the arrangement.

We will normally only agree to enter into a Group Payment Arrangement for an accounting period if the group delivers its signed arrangement document to one of our Group Payment Teams at least two months before the first Quarterly Instalment Payment is due. This is to allow time for the necessary administrative processes.

The Group Payment Teams will send every group expressing an interest a pack containing:

an Arrangement Document and schedule, and
information and guidance notes.

If we agree to enter into an arrangement, the Group Payment Team will sign the Arrangement Document on behalf of the Revenue and return it to the nominated company contact point with:

a standard covering letter, and
any further information the group may need.

The Group Payment Teams are also happy to handle any enquiries about the new arrangements.

The undertaking

Under Group Payment Arrangements, the nominated company must undertake to pay the Corporation Tax liability of all the companies covered by the arrangement. And we will not look to each of the companies individually to pay its own Corporation Tax during the period up to the date when all the companies covered by the arrangement have either filed their returns or had their Corporation Tax determined by us. (This is known as the closing date which cannot be earlier than the filing date.)

Payment of Corporation Tax under the Group Payment Arrangements must be made by electronic funds transfer. This means BACS, CHAPS or Bank Giro Credit.

The nominated company must undertake to make payments of tax on the quarterly instalment due dates on the basis of the most recent forecast of the level of group profits. That will mean adjusting its payments throughout the Quarterly Instalment Payments period if that forecast changes, increasing or reducing payments as needed. If a revised forecast shows that the nominated company has paid too little tax in respect of one or more earlier instalments, it should make a top-up payment to meet the shortfall, as well as increasing the payment for later instalments. If the nominated company believes it has overpaid on previous instalments because the group's forecast profits are down, it can claim a repayment.

A company can amend its return, and have the amendment taken into account for the purposes of working out what is due from the nominated company under the arrangement, up until the closing date. Any adjustments made to the liabilities of participating companies after that point will be dealt with on an individual company basis.

The Group Payment Arrangement does not affect the actual liability of any company. Entering into the arrangement will not absolve any company of its liability to Corporation Tax, nor mean that it cannot be pursued for payment of Corporation Tax should legal proceedings to enforce payment be required after the closing date. Corporation tax for these purposes includes tax under Sections 419 and 747 ICTA 1988 (tax due on loans by close companies to participators, and the rules covering Controlled Foreign Companies respectively).

Apportionment of payments

After the Group Payment Arrangement closing date, we will send a notice to the nominated company showing what it has paid on behalf of the participating companies and the liability at the closing date. We will ask the nominated company to make good any shortfall of Corporation Tax, and to apportion payments made to the companies covered by the arrangement. A shortfall may be allocated by the nominated company if it has reason to believe that the liability of the company to which it allocates the shortfall is likely to decrease after the closing date. The nominated company may also allocate any surplus to one or more participating company, or request its repayment. Interest will be the liability of the individual participating company. So will any late-filing penalty which may be incurred.

The Board of Inland Revenue will have the right to override the nominated company's apportionment of the payments if payment could not be secured from the company to which any shortfall was ultimately allocated.

The text of the arrangement document and the guidance notes has been posted on the Internet on our Corporation Tax Self Assessment website at www.inlandrevenue.gov.uk.

And some information on Group Payment Arrangements will be published in A Guide to Corporation Tax Self Assessment for Tax Practitioners and Inland Revenue Officers, available later this month. (The text of the Guide will also be reproduced on the website.)

If you need more information about Quarterly Instalment Payments, please contact your own tax office. If you need to know more about Group Payment Arrangements, please get in touch with the Group Payment Team at the Accounts Office dealing with the nominated company.

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

CONTRIBUTIONS AGENCY TRANSFER TO INLAND REVENUE

IMPROVED SERVICE TO BUSINESS AND THE PUBLIC

Employers and the public will soon be able to enjoy the early benefits of the transfer of the Contributions Agency from the Department of Social Security to the Inland Revenue on 1 April 1999.

The main drivers for integrating the two organisations are to provide more effective customer service and compliance by sharing knowledge, eliminating duplication, and to reduce the burden on employers. And in the longer term, make it easier to achieve gradual alignment of the tax and National Insurance Contributions (NICs) rules.

NICs policy functions will also be transferred from the Department of Social Security (DSS) to the Inland Revenue from 1 April 1999. This will give business and other representative bodies one focus for discussion of improved legislation, procedures and guidance.

Time is a major factor when planning and preparing for integration. In the longer term, this will mean redesigning processes to suit the customer and building a new organisation to deliver them. But there is a need to manage the change at a pace that protects the current business, offers stability to our customers, and facilitates more immediate benefits.

NEW ENTERPRISE SUPPORT INITIATIVE

From 6 April 1999, new employers will register for tax through the special helpline that is part of the New Enterprise Support Initiative (NESI). Initially, they will receive a Starter Pack tailored to their individual needs and can then call the special helpline for detailed help and guidance on tax and NICs while they are getting to grips with the PAYE system.

The special helpline will be backed up by locally based Business Support Teams who will help customers (including employers) meet their tax and NICs responsibilities through a mixture of educational presentation and workshops and, where necessary, one-to-one, face-to-face assistance.

INLAND REVENUE ENQUIRY CENTRES

From April 1999, Inland Revenue Enquiry Centres, (formerly Tax Enquiry Centres) will start to carry NICs leaflets as well as those on tax and will be able to handle National Insurance enquiries for personal callers. For telephone callers, national tax and NICs Helplines will be linked together to deal with enquiries about both, either directly, or by transferring the caller to the appropriate helpline.

SINGLE VISITS TO EMPLOYERS

From April 1999, employers will essentially get a single examination for tax and NICs. This is something that employers have been very keen to see, and a further step towards cutting red tape for business.

FORMS AND LEAFLETS

Over the next year we will be bringing together, where appropriate, leaflets, forms and guidance on tax and NICs. This process has already started. Some key leaflets are already available -- for example, "How to contact the Inland Revenue" explains the main avenues of assistance available to customers from the merged organisation. And CA leaflets are being rebadged in the coming months; those most frequently used will be changed by April 1999.

APPEALS

Following the merger, the appeals route for disagreements over the Inland Revenue's application of tax and NICs legislation will be aligned. The General and Special Commissioners, who hear appeals for tax issues will be responsible for hearing both sorts of appeals -- an approach which has been welcomed by business and other interested parties.

COMPLAINTS

From April 1999, complaints about the way a customer's tax and NICs affairs have been handled will be dealt with under the same system and to the same standard. The Adjudicator will continue to act as an independent arbiter in both areas, where the usual complaints process has failed to satisfy the customer.

CONSULTATION

CA and Inland Revenue national consultation groups will be merged. And for the first time for tax, we will be setting up local consultation panels in each Inland Revenue Region. Panel members will include representatives from a variety of customer groups.

interpretations

TRANSFER OF ASSETS ABROAD:
TAXATION OF INCOME UNDER THE PROVISIONS
OF SECTIONS 739-746 ICTA 1988

INTRODUCTION

Sections 739-746 Income and Corporation Taxes Act (ICTA) 1988 are anti-avoidance provisions aimed at certain transactions involving transfers of assets abroad. These notes provide guidance on how the Inland Revenue interpret various aspects of this legislation at the time of writing, in cases where the Courts have not given a definitive interpretation of particular statutory wording.

SECTION 739

It has been established by the Courts (in Lord Howard de Walden v CIR [25 TC 121]) that "power to enjoy" the income of a person resident or domiciled outside the United Kingdom is not restricted to the income or benefit actually received. However, it has not been determined by the Courts whether all the income of the overseas person should be assessed, or only the income of that person to the extent that it arose by virtue or in consequence of the relevant transfer of assets and any associated operation(s). It has been the Revenue's practice (since the decision in Vestey v CIR [54 TC 503]) to assess on the second of these two possible bases.

Section 739 can potentially apply not only to an individual who transfers assets but to someone who is "associated with" a transaction (according to the decision of the Courts in Vestey v CIR [54 TC 503]). The Revenue regard this as including anyone who procured the transfer of assets.

Where the same assets are transferred by several individuals, the Revenue's practice is to assess the transferors in proportion to their share of the assets transferred. Thus where, for example, shares of a United Kingdom company are held by three shareholders in the proportion 40%, 40% and 20% and there is Section 739 liability in respect of the income of an overseas person to which the shares are transferred, the liability is assessed on each of the three shareholders in proportion to their respective holdings.

SECTION 740

A non-UK domiciled individual who transfers assets but is outside the charge to tax under Section 739 by virtue of the provisions of Section 743(3), is not assessed under Section 740.

Similarly, a transferor of assets who is outside the charge to tax under Section 739 in respect of income arising before 26 November 1996 through being not ordinarily resident in the UK at the time of the transfer, is not assessed under Section 740.

For the purposes of Section 740(1)(b) a benefit is treated as not including either the giving of a life interest to a beneficiary or the receipt by a beneficiary of the proceeds of selling a life interest. But it is otherwise treated as including all benefits taken into account in determining whether an individual has power to enjoy income for the purposes of Section 739. It therefore includes for example receipt of a loan at less than a commercial rate of interest, and the use of trust property at less than an open market rental.

For the purposes of Section 740(3) the measure of "relevant income" is treated as not including such part of the income as has already been genuinely paid away to a beneficiary or to a bona fide charity.

Once relevant income has arisen and continues to be available to provide a benefit, it must in the Revenue's view be carried forward year by year until extinguished by such a benefit, even if it is capitalised in the accounts of the overseas person.

SECTION 741

The legislation places the onus on the taxpayer to demonstrate to the satisfaction of the Revenue that the conditions for relief under Section 741 are met, or likewise to the satisfaction of the Special Commissioners in a case where the taxpayer has appealed against a decision by the Revenue that relief is not due. In either event the terms of Section 741 in effect require the taxpayer to show that the transactions had a non-fiscal purpose, and did not also have a tax avoidance purpose. Where the taxpayer has been able to establish that at least one of the purposes for undertaking the transactions did not entail tax avoidance, the Revenue will regard it as incumbent on them to indicate why in their view tax avoidance may also have been involved. They will explain their reasons to the taxpayer, after considering fully all the arguments he or she have advanced and all the documents submitted in support of his or her contentions, and will do so prior to any Special Commissioners' hearing.

Although it is sometimes referred to as a "motive test", Section 741 in fact refers to the "purpose" of a transfer and any associated operations. Consequently, it is only the purpose of a transaction that the Revenue consider in applying the Section. "Purpose" is taken to be the end it is sought to achieve by the transaction. Furthermore, if a transaction involves tax avoidance, that is considered by the Revenue to be at least one of its purposes even if the transferor did not form the subjective intention of avoiding tax.

The law was amended in 1969 following a decision of the Courts (in CIR v Herdman [45 TC 394]) that only the transfer and any associated operations giving a power to enjoy at the outset were relevant for determining whether the terms of Section 741 were satisfied. The amendment to the legislation sought to bring all associated operations into consideration when Section 741 was invoked. Because of doubts expressed as to the effectiveness of this amendment, it has been the Revenue's practice in considering whether a defence under Section 741 is available to consider only the transfer and any associated operations which directly establish a power to enjoy the income of the overseas person under any particular sub-head in Section 742(2).

The role of advisers is taken into account in assessing the purpose of the transaction when considering the application of Section 741.

The expression "bona fide commercial" in Section 741(b) is taken to apply only to the furtherance of trade or business, and not to the making or managing of investments.

The Revenue's view is that one of the essential conditions of Section 741(b) would not be satisfied where there was a significant element of tax avoidance purpose in the design of the transfer and any associated operations.

SECTION 742

The wording of Section 742(1) is interpreted as meaning that an associated operation does not necessarily have to take place after a transfer of assets. A transaction undertaken "in relation to" a transfer of assets can precede the transfer.

SECTION 743

Unless transactions are part of a wider arrangement, Revenue practice is not to seek to assess a UK domiciled individual on the income of a non-UK domiciled spouse, where that income arises from a transfer of assets by that spouse and would be outside the charge to tax under Section 739 by virtue of the provisions of Section 743(3).

Where a non-UK domiciled individual transfers assets but is not chargeable to tax under the provisions of Section 739 owing to Section 743(3), there is no bar in the Revenue's view on the application of Section 740 to others who did not themselves make the transfer but were beneficiaries of it.

SECTION 744

Where more than one person can be potentially assessable under Sections 739/740, the Revenue will seek to agree with the taxpayer under the terms of Section 744 a "just and reasonable" division of liability.

SECTION 745

In the Revenue's view the introduction of a client to anyone responsible for establishing an overseas entity does not constitute the giving of professional advice to a client within Section 745(3).

MISCELLANEOUS

Where income could be fully assessed under both Section 739 and the settlements legislation in Part XV of the ICTA 1988, it will not in practice be charged under both. Similarly, income will not in practice be charged on both the beneficiary under Section 740 and the settlor under the settlements legislation, where an assessment could in strictness be made on each of them in a case involving income that is accumulated within a discretionary offshore trust in which the settlor retains an interest, and then paid to a beneficiary as capital. However, in both cases this is subject to the proviso that the Revenue may sometimes raise alternative assessments, for example where a taxpayer has not provided full information. Moreover, where income arises in an offshore company underlying a settlement and the income is not paid up immediately to that settlement, the provisions of Section 739 will be invoked where necessary to assess the income of the underlying company.

The Revenue's practice is only to allow trading losses in an offshore company to be carried forward to be offset against future trading profits of that company. They cannot be offset against investment income of the same, previous or future years.

Because of their complex and specialised nature the provisions of Sections 739-746 are applied in individual cases by the Revenue's Special Compliance Office and Financial Intermediaries and Claims Office (see Inspector's Manual paragraph IM4622). It is incumbent on taxpayers or their advisers to draw the Revenue's attention to the implications of the legislation when submitting details of transactions to which it may potentially apply (in the light of the decision of the Courts in Regina v CIR ex parte MFK Underwriting Agents Ltd [62 TC 607]).

Taxpayers are required to disclose clearly in their self assessment return if there is any income or benefit assessable under Section 739 or 740, and whether reliance is being placed on Section 741 to exclude income or benefit from assessment. Where such a disclosure has been made and exemption under Section 741 claimed, the Revenue will make any necessary enquiries about that exemption in the statutory period allowed, and will not seek to reopen that year's return on discovery grounds if the Section 741 exemption has to be reconsidered in later years.

CAPITAL GAINS TAX --
SOME RETIREMENT RELIEF POINTS

This article covers:

our present understanding of the meaning of full-time working officer or employee following the judgment in the case of Palmer v Maloney and Shipleys [71 TC 1983];
the effect of the phasing out of retirement relief on claims for relief under ESC D31;
how we will treat disposals which are associated with other events which take place around 5 April 2003.

FULL TIME WORKING OFFICER OR EMPLOYEE

We have had enquiries about our published view of the meaning of full-time working officer or employee for the purposes of paragraph 1 Schedule 6 TCGA 1992 following the judgment of Mr Justice Laddie in Palmer v Maloney and Shipleys.

This case concerns a claim for damages brought by Mr Palmer against his former accountants contending that he would have qualified for retirement relief if he had realised the profit in his company shareholding by way of a capital distribution, and that his accountants had been negligent in not advising him to that effect. The defendants stated that Mr Palmer did not qualify for retirement relief because he did not devote substantially the whole of his time to the service of the company. Judgment was given in favour of the defendants but the decision is subject to further litigation.

Our longstanding practice does not accord with the tests which Mr Justice Laddie applied to determine whether an individual is a full-time working officer or employee. For the moment however we can confirm that our interpretation of the definition of full-time working officer or employee for the purposes of CGT retirement relief will remain unchanged pending the case becoming final. In particular we shall continue to abide by our published view in CG63621 on the meaning of the words "substantially the whole of his time" contained in the definition of full-time working officer or employee at paragraph 1 Schedule 6 TCGA 1992.

This guidance is that one should consider whether someone devotes substantially the whole of his time to the service of the company by reference to the normal working week. For a company which has other full-time employees this can be taken to mean at least three quarters of the full normal working hours.

We will fully review, following finalisation of the litigation, whether or not it is necessary to re-appraise our understanding of the words "substantially the whole of his time" in the light of judicial observations. If reappraisal should prove necessary, we will determine what action needs to be taken in the light of a detailed study of the court judgments; a further announcement would then be made about our future approach.

EXTRA STATUTORY CONCESSION D31 AND PHASING OUT OF RETIREMENT RELIEF

The effect of ESC D31 is to alter the date of disposal for retirement relief purposes where, pending completion of an unconditional contract, business activities continue beyond the date of that contract. Normally the date of disposal of an asset is determined by Section 28 TCGA, and will be the date of the unconditional contract. However when we are looking at the application of retirement relief we may consider the qualifying conditions by reference to the date of completion in accordance with ESC D31.

The result of this where the date of the unconditional contract and the date of completion span two tax years is described at CG63291. If an individual is under the qualifying age at the time of the unconditional contract in one tax year, but continues in business until completion in the following tax year, and at completion has reached the qualifying age of relief, then we may accept that the individual is eligible for retirement relief in respect of the disposal in the earlier year (subject to all other provisions being fulfilled).

Where the date of completion is treated as the date of disposal in accordance with the ESC, then that date applies to all aspects of retirement relief including the amounts of relief available in the year of disposal when completion occurs.

This means that if an individual enters into an unconditional contract in the year ended 5 April 1999, but is only 49 at that date, and the contract is not completed until May 1999 when he is 50, then the retirement relief due will be calculated by reference to the lower amount of relief available in the year ended 5 April 2000.

It also means that where an unconditional contract is before 5 April 2003 and completion is not until after that date ESC D31 will not give access to retirement relief. This is because retirement relief would only be due by reference to the date of completion, and in the year ended 5 April 2004 retirement relief is no longer available.

SOME OTHER ASPECTS OF THE PHASING OUT OF RETIREMENT RELIEF

The final date for a disposal upon which retirement relief may be due is 5 April 2003. There are a number of situations where a disposal will qualify for retirement relief only if it can be associated with another event. The examples below illustrate some of the situations in which disposals will not qualify for relief because an associated event falls after 5 April 2003:

Where there is an associated disposal before 5 April 2003, but the material disposal is after that date then for the purposes of Section 164(6) and (7) TCGA no retirement relief would be due on the gain on the earlier associated disposal. This is because no relief falls to be given on the material disposal which takes place at a time when retirement relief is no longer available.
Where there is the cessation, or disposal of the whole or part of a business, prior to 5 April 2003, and there is a disposal of assets or an associated disposal after that date retirement relief will not be available in respect of any gain arising on that disposal because Sections 163, 164 and Schedule 6 TCGA shall not have effect in relation to disposals in 2003-04 and subsequent years of assessment by virtue of Section 140(2) FA 1998.

Any questions on this guidance should be directed to:

Jeffrey Davenport

Capital and Savings Division

Sapphire House

Streetsbrook Road

Solihull

B91 1QU

(Superceded by CA 24010)
CAPITAL ALLOWANCES ON MACHINERY OR PLANT LEASED
OUTSIDE THE UK

Section 42 CAA 1990 restricts the capital allowances available on machinery or plant leased outside the United Kingdom. Subsection (1) provides that the section applies where the asset is leased to a person who is neither resident in the UK nor using the asset exclusively for the purposes of a trade whose profits are chargeable to UK tax, unless the leasing is short-term or the leasing of a ship, aircraft or transport container which is used for a qualifying purpose as defined in Section 39(6) to (9) CAA 1990. Subsection (2) provides that where the Section applies, writing down allowances are given at 10 per cent per annum, rather than at 25 per cent. Where any of the conditions in Subsection (3) applies, no capital allowances are due.

It has previously been the view of the Inland Revenue, as explained in paragraph 2832 of the Capital Allowances Manual, that where there is a chain of leases, the tests in Section 42(1) are applied to the end lessee only.

The Solicitor of Inland Revenue has advised that this interpretation of the legislation is incorrect. The Solicitor has advised that Section 42 should apply where any lessee in the chain, whether an intermediate lessee or the end lessee, meets the conditions in Section 42(1).

We will accept the previous interpretation for leasing arrangements entered into:

before the date of the publication of this Tax Bulletin, 19 April 1999
within three months after the date of publication of this Tax Bulletin where the principal terms of the leasing arrangement have been agreed in writing before the date of publication (for example in an agreed term-sheet or accepted offer letter) and have not materially altered since that date.

In all other cases, we will apply the revised view that Section 42 will apply where any lessee or sub-lessee meets the conditions in Section 42(1).

miscellaneous

REVENUE PROSECUTIONS

The Inland Revenue has a 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, details of Revenue prosecutions are published in Tax Bulletin.

Recent convictions include:

Alexander David Spyrou

Mr Spyrou, formerly a director of Interport Marine Agencies Ltd, was sentenced to 3 years imprisonment for cheating the Revenue. He pleaded guilty to defrauding the Inland Revenue by claiming deductions and failing to disclose income from the company. He also falsely declared under the Hansard practice that he had made a complete declaration of his personal and business affairs. The estimated tax lost was £525,393.

Michael John Dwane

Mr Dwane was a motor dealer from Lincoln. He was sentenced to 15 months imprisonment for submitting false accounts, which he claimed to be true statements of his assets and liabilities. In fact he had concealed details of a loan account, two Ferrari cars and interest earned on two bank accounts. He had then signed a certificate of disclosure that falsely asserted that all bank accounts had been declared. The tax lost was estimated at £50,000.

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

ABOLITION OF ADVANCE CORPORATION TAX (ACT)
AND THE 10% TAX CREDIT

IMPACT ON COMPANIES

When a company pays a dividend or other qualifying distribution on or after 6 April 1999 it no longer has to account for ACT. The dividend etc. will carry a 10% tax credit (previously 20%), although for most shareholders this will be a non payable tax credit.

There are no changes to the statutory requirements about the information to be shown on the dividend certificate. Because there are still exceptional circumstances where the new 10% tax credit remains payable, it cannot be described as a "non payable tax credit".

We do however suggest that companies highlight the changes which will affect shareholders in any accompanying notes which they issue. These changes are summarised in the following paragraph.

"Apart from certain payments under some Double Taxation Agreements, the only situation after 5 April 1999 where the 10% tax credit remains payable to an individual, is if the shares giving rise to the dividend are held in a PEP or an ISA. And it only applies to tax credits on dividends paid before 6 April 2004.

This dividend certificate should be retained, and if required can be produced to the Inland Revenue as evidence of a 10% tax credit."

The dividend certificate should show the following three headings, and if for example a dividend of £80 is paid, the respective figures under each heading are also indicated.

Dividend	10% tax credit	Total
£80.00	£8.89	£88.89

There is no need for the company to either report the dividend or to account for the 10% tax credit on a CT61 return, during the relevant Accounting Period(AP). The dividend must however be included in the company accounts in the same way as for a dividend paid in an AP ending before 6 April 1999.

Any corporation tax due on the profits of the AP should be paid on or before the respective due date, (normally nine months and one day after the end of the AP), subject to any requirement to make quarterly instalment payments where the accounting period ends on or after 1 July 1999.

IMPACT ON INDIVIDUALS

As from 6 April 1999 the tax credit will be reduced from 20% to 10% of the sum of the dividend plus the tax credit.

For example, the tax credit on a dividend of £80 will be £8.89.

That is 10% of (£80 plus 1/9)

Individual shareholders will not normally be entitled to claim a repayment of the 10% tax credit attached to any dividend paid on or after 6 April 1999. This has been explained in the R40 claim forms since April 1998.

The only exception is where the shares are held in an ISA or a PEP. In these cases the tax credit attached to the dividend will remain payable for a further 5 years, i.e. until 5 April 2004.

Individual shareholders whose total taxable income is within the starting or basic rate bands, will only be liable to tax at 10% on their dividend income. This means that the 10% tax credit will continue to satisfy their tax liability on those dividends.

Individual shareholders who are higher rate taxpayers, can set the 10% tax credit against their personal liability on the dividend, which will be charged at a new rate of 32.5%.

For example, if a higher rate taxpayer receives a dividend of £80, the tax due will be £28.89. (That is the total of the dividend and the tax credit of £88.89, charged at the new upper rate of 32.5%). The 10% tax credit of £8.89 can then be set against the tax due of £28.89, leaving the higher rate taxpayer with only £20 to pay.

NEW STYLE CT61 RETURNS FOR INTEREST AND ANNUAL COMPANY PAYMENTS

The CT61 return has been redesigned, and now only relates to interest, other annual company payments, and manufactured interest.

Information about these changes has been included with all CT61 returns issued during the last 9 months. As a customer service initiative, all of the companies which we think are likely to make such payments during the next year will receive the new style CT61 return package during this month.

One of the improvements which we have made is to print the company's name and reference number on both the CT61 notice and the CT61 return. This will save companies having to copy the information from the notice onto the return.

We will also be accepting approved substitute versions of the new style CT61 return, and further information on this can be obtained from:

Inland Revenue

BMSD Forms Unit

9th Floor

North West Wing

Bush House

Aldwych

London

WC2B 4PP

The Accounts Offices will continue to issue blank CT61 returns in certain urgent situations, although every company's own Tax Office can arrange for automatic personalised returns to be issued.

Any company which is likely to use the new style return and has not received a copy by the end of April, or which requires a further copy of the old style CT61 return, should contact its own Tax Office as soon as possible.

The abolition of ACT does not affect the final "old style" CT61 return period. Where for example a company pays a dividend etc. during the 5 day period from 1 to 5 April 1999, the return period will be either the normal quarter to 30 June, or to the end of the company's Accounting Period, if earlier.

LATE SUBMISSION OF STATUTORY DECLARATIONS
UNDER SECTION 703(9)

ICTA 1988

The Section 703 Compliance Unit was recently asked to extend the 30 day time limit for the submission of a statutory declaration in response to a notification issued by the Board of Inland Revenue under Section 703(9).

The Board's view is that the acceptance of a statutory declaration after the expiry of the time limit laid down at Section 703(9) is strictly a matter for the Section 706 Tribunal. Any taxpayer wishing to ascertain whether the Board will object to the late submission of a statutory declaration should write to the Section 703 Compliance Unit explaining why they are unable to meet the statutory time limit at Section 703(9) and saying when they expect to be in a position to submit the statutory declaration.

The Board will not normally object to a short delay in the submission of a statutory declaration in any case where a major public holiday falls within 30 days of the issue of the Section 703(9) notification. All other requests will be considered by the Section 703 Compliance Unit according to the facts and circumstances of the particular case.

(No longer relevant)
TAX TREATY NETWORK:
UPDATE

Jordan

Discussions were held with Jordan from 28 February to 3 March 1999 on the terms of a comprehensive double taxation agreement. Good progress was made and it was agreed that a further round of talks would take place shortly in London at a date convenient to both sides.

Kuwait

A new comprehensive Double Taxation Agreement between the United Kingdom and Kuwait was signed in London on 23 February 1999. A further update will be made when the text of the Agreement is published as the schedule to a draft Order in Council and laid before the House of Commons for approval.

Representations

Representations about new double taxation agreements or suggestions about changes to existing double taxation agreements are always welcome and should be addressed to:

Bill Rafferty

Inland Revenue

International Division

2nd Floor

Victory House

30-34 Kingsway

London

WC2B 6ES

Telephone: 020 7438 6745

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

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 Savings Division

Room 121, 3rd Floor

New Wing

Somerset House

Strand

London

WC2R 1LB

Telephone: 020 7438 7741

DETAILS OF CLIENTS' SELF ASSESSMENT STATEMENTS OF ACCOUNT

Updated details of clients' accounts with the Revenue will be provided in the week beginning 10 May 1999. The details should normally include the 1997-98 balancing payment, the first 1998-99 payment on account where appropriate, and the payments made against them. The details will be taken from the Revenue computer system, showing charges due and payments made up to 22 April 1999 inclusive.

(No longer relevant)

RECOGNISED STOCK EXCHANGES OVERSEAS

The phrase "recognised stock exchange" occurs throughout the Taxes Act and in various tax regulations. For example it is used in the definition of a close company (in Section 415 Income and Corporation Taxes Act (ICTA) 1988, and in the definition of investments which may be held in PEPs and ISAs.

The definition of a recognised stock exchange is at Section 841 ICTA 1988. It includes the London Stock Exchange and any such Stock Exchange outside the UK as approved by an Order of the Board of the Inland Revenue.

The Revenue regularly receives queries about whether particular overseas stock exchanges count as recognised stock exchanges.

The current list of recognised stock exchanges is set out opposite. Updates are published periodically in various Revenue manuals, but copies can also be obtained direct from:

Financial Institutions Division

Second Floor

West Wing

Somerset House

Strand

London WC2R 1LB

Recognition under Section 841 ICTA is for tax purposes only: it does not imply recognition or approval for regulatory or other purposes.

The Board's policy is to consider recognition on receipt of a request made by an overseas stock exchange. So, the fact that a particular exchange is not listed may simply mean that recognition has not been requested.

List of Stock Exchanges designated as "recognised stock exchanges" by Order of the Board under Section 841(1)(b) ICTA 1998, as at April 1999

The Athens Stock Exchange

The Australian Stock Exchange and any of its stock exchange subsidiaries

The Colombo Stock Exchange

The Copenhagen Stock Exchange

The Helsinki Stock Exchange

The Johannesburg Stock Exchange

The Korea Stock Exchange

The Kuala Lumpur Stock Exchange

The Mexico Stock Exchange

The New Zealand Stock Exchange

The Rio De Janeiro Stock Exchange

The Sao Paulo Stock Exchange

The Singapore Stock Exchange

The Stockholm Stock Exchange

The Stock Exchange of Thailand

The Swiss Stock Exchange

Any stock exchange in the following countries which is a stock exchange within the meaning of the law of the particular country relating to stock exchanges (or as specified below).

Austria

Belgium 1 Canada -

Any stock exchange prescribed for the purposes of the Canadian Income Tax Act

Ireland (Republic of) France Germany Hong Kong -

Any stock exchange which is recognised under Section 2A(1) of the Hong Kong Companies Ordinance

Italy Japan Luxembourg Netherlands Norway Portugal Spain USA -

Any exchange registered with the Securities and Exchange Commission of the United States as a national securities exchange

USA -The NASDAQ Stock Market as maintained through the facilities of the National Association of Securities Dealers, Inc and its subsidiaries

(1) The Board accepts that EASDAQ falls within the Order relating to Belgium.

INLAND REVENUE STATEMENTS OF PRACTICE AND EXTRA-STATUTORY CONCESSIONS ISSUES BETWEEN
1 FEBRUARY 1999 AND 31 March 1999

Extra Statutory Concessions

There have been no Extra Statutory Concessions issued in this period

Statement of Practice

Number	Title	Date of Issue
02/99	Monthly Savings in Investment Funds (This supercedes 2/97	31/3/99

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 1999 is £22. 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 530, 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 408, 22 Kingsway, London WC2B 6NR.

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

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Tax Bulletin Issue 40

INLAND REVENUE TAX BULLETIN Issue 40

CONTENTS

(Superseded by Leaflets CIS 340 and IR40(CIS)) CONSTRUCTION INDUSTRY SCHEME

CARD OR CERTIFICATE

CIS5 CERTIFICATES

AUTOMATIC QUALIFICATION

BUSINESS CASE

!This article is no longer current (Deleted Index 2002) INTERACTION OF TAX LAW AND ACCOUNTANCY PRACTICE: RECENT DEVELOPMENTS

FRS 12 'PROVISIONS, CONTINGENT LIABILITIES AND CONTINGENT ASSETS'

FRS 10 'GOODWILL AND INTANGIBLE ASSETS'

THE FRSSE

HERBERT SMITH V HONOUR

(Superseded by BIM41145) TAXATION OF 'REVERSE PREMIUMS'

(Superseded by BIM64170 onwards) PRIVATE FINANCE INITIATIVE (PFI) PROJECTS: TREATMENT OF SURPLUS LAND

INTRODUCTION

BACKGROUND -- ACCOUNTING TREATMENT

MISCELLANEOUS MATTERS

A MODERN SYSTEM FOR CORPORATION TAX PAYMENTS: QUARTERLY INSTALMENT PAYMENTS AND GROUP PAYMENT ARRANGEMENTS

QUARTERLY INSTALMENT PAYMENTS

! This Article Is No Longer Current (Deleted Index 2004) CONTRIBUTIONS AGENCY TRANSFER TO INLAND REVENUE

IMPROVED SERVICE TO BUSINESS AND THE PUBLIC

NEW ENTERPRISE SUPPORT INITIATIVE

INLAND REVENUE ENQUIRY CENTRES

SINGLE VISITS TO EMPLOYERS

FORMS AND LEAFLETS

APPEALS

COMPLAINTS

CONSULTATION

interpretations

TRANSFER OF ASSETS ABROAD: TAXATION OF INCOME UNDER THE PROVISIONS OF SECTIONS 739-746 ICTA 1988

INTRODUCTION

SECTION 739

SECTION 740

SECTION 741

SECTION 742

SECTION 743

SECTION 744

SECTION 745

MISCELLANEOUS

CAPITAL GAINS TAX -- SOME RETIREMENT RELIEF POINTS

FULL TIME WORKING OFFICER OR EMPLOYEE

EXTRA STATUTORY CONCESSION D31 AND PHASING OUT OF RETIREMENT RELIEF

SOME OTHER ASPECTS OF THE PHASING OUT OF RETIREMENT RELIEF

(Superceded by CA 24010) CAPITAL ALLOWANCES ON MACHINERY OR PLANT LEASED OUTSIDE THE UK

miscellaneous

REVENUE PROSECUTIONS

ABOLITION OF ADVANCE CORPORATION TAX (ACT) AND THE 10% TAX CREDIT

IMPACT ON COMPANIES

IMPACT ON INDIVIDUALS

NEW STYLE CT61 RETURNS FOR INTEREST AND ANNUAL COMPANY PAYMENTS

LATE SUBMISSION OF STATUTORY DECLARATIONS UNDER SECTION 703(9)

ICTA 1988

(No longer relevant) TAX TREATY NETWORK: UPDATE

DETAILS OF CLIENTS' SELF ASSESSMENT STATEMENTS OF ACCOUNT

(No longer relevant) RECOGNISED STOCK EXCHANGES OVERSEAS

INLAND REVENUE STATEMENTS OF PRACTICE AND EXTRA-STATUTORY CONCESSIONS ISSUES BETWEEN 1 FEBRUARY 1999 AND 31 March 1999

Statement of Practice

INLAND REVENUE TAX BULLETIN
Issue 40

(Superseded by Leaflets CIS 340 and IR40(CIS))

CONSTRUCTION INDUSTRY SCHEME

!This article is no longer current (Deleted Index 2002)

INTERACTION OF TAX LAW AND ACCOUNTANCY PRACTICE:
RECENT DEVELOPMENTS

(Superseded by BIM41145)

TAXATION OF 'REVERSE PREMIUMS'

(Superseded by BIM64170 onwards)

PRIVATE FINANCE INITIATIVE (PFI) PROJECTS:
TREATMENT OF SURPLUS LAND

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

CONTRIBUTIONS AGENCY TRANSFER TO INLAND REVENUE

TRANSFER OF ASSETS ABROAD:
TAXATION OF INCOME UNDER THE PROVISIONS
OF SECTIONS 739-746 ICTA 1988

CAPITAL GAINS TAX --
SOME RETIREMENT RELIEF POINTS

(Superceded by CA 24010)
CAPITAL ALLOWANCES ON MACHINERY OR PLANT LEASED
OUTSIDE THE UK

ABOLITION OF ADVANCE CORPORATION TAX (ACT)
AND THE 10% TAX CREDIT

LATE SUBMISSION OF STATUTORY DECLARATIONS
UNDER SECTION 703(9)

(No longer relevant)
TAX TREATY NETWORK:
UPDATE

(No longer relevant)

RECOGNISED STOCK EXCHANGES OVERSEAS

INLAND REVENUE STATEMENTS OF PRACTICE AND EXTRA-STATUTORY CONCESSIONS ISSUES BETWEEN
1 FEBRUARY 1999 AND 31 March 1999