Tax Bulletin Issue 44

December 1999

CONTENTS

• Self Assessment: The 31 January Deadline (Article no longer current)
• Steeden V Carver (SpC 212) (No longer relevant)
• The Reform of Reliefs and Allowances (Article no longer current)
• Interaction of Tax Law and Accountancy Practice (Article no longer current) (Superseded by BIM31000 onwards)
• E-Commerce Tax in the Electronic Age

Interpretations

• Industrial Buildings Allowance (Superseded by CA32224)
• Reverse Premiums (Superseded by BIM41050 onwards)

Miscellaneous

• Pension Schemes Office -Synopsis of Updates (Article deleted since index 2004)
• Statements of Practice and Extra-Statutory Concessions

Electronic Commerce Subscribers to Tax Bulletin will find a free CD ROM enclosed with this issue containing a recent Government paper -Electronic Commerce: `The UK's Taxation Agenda'. There is a short summary of the paper at page 709 of Tax Bulletin. The full document is also available on both the Revenue's and Customs' web sites at: www.inlandrevenue.gov.uk/ebu/ecom.htm www.hmce.gov.uk/bus/info/e-comm.htm (Link no longer available)

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 This Article Is No Longer Current (Deleted Index 2001)

SELF ASSESSMENT: THE 31 JANUARY PAYMENT AND FILING DEADLINE COMES ROUND AGAIN

31 January is approaching once again. The Inland Revenue wants to ensure that taxpayers are well-placed to comply with their obligations to file their Self Assessment (SA) returns and pay their liabilities. We recognise that also means putting agents in a position to help their clients comply. This article looks at some of the improvements we have made to the Statement of Account (SA300) and the agent statement (SA327) to help taxpayers and their agents. It sets out the timetable we are following this year in issuing the various SA forms. And it offers advice on best practice, to help taxpayers and agents to help themselves.

Improvements to statements and agent statements

The Statement of Account has been criticised for lack of clarity ever since it was introduced. Many statements are reasonably limited in the information they provide, but many are a little more complex. In either case we need to signal more clearly the overall message (is there an amount to pay? If so, what is it, and when do I have to pay?), and set out the supporting detail more helpfully.

We started to move towards this in January 1999, when we introduced subtotals to show the net effect where charges had been adjusted or more than one payment made against a charge. Unfortunately that change was overshadowed by the fault which meant that superfluous information appeared on some statements. That caused difficulties for taxpayers, agents and our own staff. Naturally we have tested this year's changes to the statement even more rigorously to try to avoid any repetition of the problems.

This year we hope that we have taken a significant step towards making the statement much clearer and easier to understand. There are three primary changes.

First, the total amount to pay will be shown in a box at the top of the main part of the statement, below the address details. Where there is nothing to pay that will also be shown.

Second, while the detail of the charges will continue to be shown, there will be a final total line, so that it will be possible to work through the detail and reconcile it with the total amount to pay.

Third, the total amount to pay will also be printed on the payslip in many more instances than it was previously.

One other change in more complex cases is to provide only the final net figure where there have been a number of adjustments of the same kind to a particular item. For example, a single net adjustment figure will appear on the statement where there have been a number of adjustments to a payment on account.

We have also made changes to the agent statement (form SA327). The critical one is in response to frequent requests from agents for payslips to be sent direct to them so that they can help their clients to pay on time. Accordingly in future, the statement for each client will have a payslip attached, incorporating the tax reference for the client. We will be issuing agent statements before the 31 January and 31 July payment dates.

The timetable for statements, reminders and agent statements

Given all the concerns around the “Millennium bug” we feel that it is prudent to carry out as much work in December as we possibly can. But we have tested Revenue systems thoroughly and are confident that we will not face any significant problems as we move into the New Year. Please bear in mind that agents will need to take similar precautions with their own systems if they have not already done so. We will continue to pursue any failure to make payment or file returns on time exactly as we do now.

We plan to issue to taxpayers in December 1999 an estimated 4 million Statements of Account (forms SA300). These will have a personalised payslip showing the amount to pay on or before 31 January 2000 (any 1998-99 balancing payment and any 1999-2000 first payment on account). The date on each statement is the date on which we take the details from our computer system and not the date of issue.

We intend to start the issue of statements on 13 December and complete it by Christmas Eve. Statements should therefore be arriving with taxpayers over a period of time. Even allowing for the Christmas post they should be received by the beginning of January at the latest.

We will also be issuing to taxpayers an estimated 3.5 million Self Assessment reminders (form SA309). Please bear in mind that as in previous years reminders will be issued where the 1998-99 return has either not been received or has been received but not processed. We will not therefore know the amount due on or before 31 January but the payslip with the reminder will enable the taxpayer to make payment. We intend to start issuing reminders in late December/early January. Reminders too will arrive over a period of time, but should be with taxpayers by 14 January at the latest.

We will then concentrate our efforts on issuing to agents the estimated 4.2 million agent statements (form SA327). We did look very carefully at trying to bring this issue forward. But you will appreciate from the timetable above that December is already very full, and the facility of attaching payslips to agent statements will not be available any earlier. We were constrained by particular factors this year but we will be reviewing the timetable again for next year.

The agent statements will reflect the position at the start of the Christmas holiday and will be dated 26 December. We are planning to start the issue of agent statements on 4 January and to complete it by 14 January. The agent statements should arrive by 18 January at the latest. While this is later than we would like, it should still put agents in a position to help their clients pay on time. The agent statements will cover the period since the issue of the last agent statement in April 1999 and may show a more up to date position than the client's Statement of Account since the details will have been taken from the system later.

Please note that Tax Offices will be open up to and including Christmas Eve. They will also be open on 29 and 30 December, and then re-open after the Millennium break on Tuesday 4 January (except for Scotland where 4 January will be a public holiday, and Scottish Tax Offices will be closed). The SA Helpline (0845 9000 444) will be open as usual, 8am to 10pm, 7 days a week, except for 25 December, 31 December, and 1 January. The Orderline (0845 9 000 404) works to the same hours. There will be no live operator service on 25 December, 31 December and 1 January but it will be possible to leave a message.

Making payment

Payment may be made electronically by BACS or CHAPS. In addition we are carrying out an experiment to test the taxpayer demand for payment by debit card. A random sample of taxpayer statements will include a mailshot advertising this facility. Taxpayers who have a Switch, Solo or Visa Delta debit card can pay their SA tax by telephoning 0845 305 1000 any time between 8.00 a.m. and 10.00 p.m. This service is available every day except 25 December, 31 December and 1 January.

Where payment is made by other means it is very important that the payslip issued with the statement or the agent statement for your client accompanies any payment. The encoded personalised details on the payslip ensure that the payment is allocated quickly to the right account. Please note that agents will need to enter the amount of the payment if they are using the payslip with the agent statement for the client to make payment.

We recommend that payment is made by Bank Giro or at the Post Office rather than by post. The payment is then allocated quickly and securely to the right account. If payment is made by post, please send it to the Accounts Office (and not to the Tax Office) in the envelope provided to your client and accompanied by a personalised payslip for your client. If you are unable to use either of the personalised payslips please obtain a blank payslip from the Tax Office.

Any problem or enquiry about making payment should be addressed to the Accounts Office. The telephone number is shown on the front of the statement. But any query about the charges on the statement should be taken up with the Tax Office.

Where payments are sent to the Accounts Office it is best to have a single payment and a single payslip. But where composite payments for more than one taxpayer are made on a single cheque, please ensure there is a separate personalised payslip for each taxpayer and that the individual amounts for each taxpayer add up to the total of the cheque. Any problem in reconciliation will delay the updating of the records for all the taxpayers involved.

Filing the return

The Self Assessment reminder reminds taxpayers about the need to send in the return. It will also be issued where we have received but not yet processed the return. Reminders are also issued for partnership returns where the return has not been recorded as received by us.

Please bear in mind that the return needs to be complete to be accepted. It is always worth a quick final check of some obvious points, such as that the return is signed and all the relevant supplementary pages have been provided.

Please see the section below concerning the use of provisional figures in the return. Returns can be accepted by any Tax Office. But we strongly recommend that the return is sent back to the issuing office to avoid possible difficulties over recording and tracing the return.

31 January falls on a Monday in the year 2000. No penalty will be charged if returns are received in the post or by hand at any time on Tuesday 1 February or if if they are in the Tax Office post box by 7: 30am on Wednesday 2 February. The legal basis for this change of approach is explained in the next article.

Obviously last minute compliance is risky and spreading the workload of sending in returns is beneficial to both sides, where it can be achieved. Agents who have joined the Electronic Lodgement Service will be able to transmit the return much more efficiently, and will also have the benefit of an early acknowledgement.

Use of provisional figures in returns (1998-99 and subsequent years)

The article in Tax Bulletin 37 (pages 593/ 596) sets out in detail the Revenue approach to the acceptance of provisional figures in SA return forms and the notes to the 1998-99 return clarify the limited circumstances in which provisional figures will be treated as meeting the obligation to file a return.

Where a provisional figure is used we require the taxpayer to tick box 22.3 and to use the additional information section on page 8 of the core return to:

• give an acceptable explanation for the delay in providing final figures, and

• a date by which they expect to provide the final figure.

Unless both of the above are given we will reject the return as not in the prescribed format. We will not regard pressure of work either on the taxpayer or their tax adviser, or the complexity of the taxpayer's affairs, as reasons for accepting a return containing a provisional figure.

(No longer relevant)
STEEDEN V CARVER (SPC 212) - IMPLICATION FOR 31 JANUARY 2000 FILING DATE

This note sets out our view of the practical implications for the deadline for filing SA returns of the decision in Steeden v. Carver (Sp C 212) which concerned a return handed in at the tax office mid-morning on Monday 2nd February 1998.

The law requires the return to be delivered to the tax office no later than midnight at the end of 31 January. But the £100 fixed filing penalty is not charged where a return is filed late and the taxpayer had a “reasonable excuse” throughout the “period of default” defined in Section 93(10). That period starts at the beginning of 31 January and ends at midnight on the day before the day on which the return is actually filed. Our view of when the period starts is contrary to the comment of the Special Commissioner in Steeden to the effect that the period of default begins at midnight at the end of 31 January . His decision does not however turn on that point and we consider the detailed statutory definition of the period of default clearly supports our view.

Our approach reflects the fact that, where a return is put in the tax office post box overnight, there are practical difficulties in telling whether it was delivered before or after midnight.

For returns required to be filed by 31 January 2000 we take the view that:

• a return delivered by midnight at the end of 31 January is clearly on time and there is no question of a late filing penalty,
• a return found in the tax office post box before 7: 30 am on Tuesday 1 February will be treated as put there before midnight and, hence, as filed on time;
• a return delivered by hand or in the post later on that day is late and the “period of default” is the whole of 31 January. But, following the Steeden decision, we will accept that the taxpayer had a reasonable excuse throughout that period, and no penalty will be charged;
• a return found in the tax office post box before 7: 30 am on Wednesday 2 February will be treated as put in the box before midnight on 1 February; this means that it was filed late and the period of default is the whole of 31 January, but we will accept that the taxpayer had a reasonable excuse throughout that period and no penalty will be charged;
• a return found in the post box subsequently (or handed in at any time during or after 2 February) is late and attracts a penalty except where on the particular facts of the case the taxpayer can show he or she had a reasonable excuse throughout the period of default.

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

THE REFORM OF INCOME TAX RELIEFS AND ALLOWANCES

In his March 1999 Budget, the Chancellor announced a package of reform of income tax reliefs and allowances. The married couple's allowance and related reliefs and allowances are largely being withdrawn from 6 April 2000 and a new allowance, called the children's tax credit, is being introduced from 6 April 2001. Relief for mortgage intrest paid on house purchase and home improvement loans is also withdrawn from April 2000.

This article is intended to:

• remind you of the changes;
• tell you how we plan to implement them; and
• flag up how and when they may affect you/ your clients.

From 6 April 2000 the following reliefs/allowances will be abolished:

• married couple's allowance where both spouses were born after 5 April 1935. Couples becoming 65 on or after 6 April 2000 will no longer be entitled to this allowance;
• additional personal allowance;
• widow's bereavement allowance for new claimants from 6 April 2000. Women who are widowed during 1999-2000 will keep the allowance for 2000-2001 under the existing rules;
• relief for maintenance payments where both parties to the former marriage were born after 5 April 1935. For those older people who remain entitled to maintenance relief, the special transitional relief for payments under maintenance arrangements originally set up before 15 March 1988 is being ended. Instead, all relief will be given under rules which apply to post 15 March arrangements regardless of the date the arrangements were set up. Recipients of payments made under arrangements set up before 15 March 1988 will no longer be taxable on the payments they receive;
• the transitional provisions introduced to shield some people whose allowances would otherwise have been reduced when independent taxation was introduced; and
• relief for mortgage interest paid on house purchase or home improvement loans. As these loans cease to be qualifying loans for the purposes of S160 ICTA 1988, they will have to be aggregated with other non qualifying loans when calculating any benefit charge. This means that some non qualifying loans previously covered by the £5000 exemption limit under S161(b) will become subject to a benefit charge. Employers will be asked to report details of these loans on forms P11D for 2000-2001.

In addition, the basic rate is to be reduced to 22% from 6 April 2000.

You will be able to obtain more information about what these changes mean for a client's personal tax affairs by contacting their individual tax offices. Our staff will be receiving detailed guidance on the changes in early December 1999 and it would be helpful if any queries you have are made after mid-December.

The Chancellor also announced the introduction from 6 April 2001 of a new allowance called the Children's Tax Credit.

Changes from 6 April 2000

PAYE coding notices for 2000-2001 reflecting, where appropriate, the changes outlined above will be issued in January to around 12m taxpayers.

In addition to the usual leaflet that accompanies coding notices (P3), this bulk mailing will also include a leaflet providing more detailed information about the changes to the married couple's allowance, additional personal allowance and maintenance payments as well as some introductory information about the new children's tax credit.

We always get a large number of people contacting us as a result of annual re-coding. We think that we will get a larger number than normal next year because of the changes to the married couple's and additional personal allowances in particular.

Experience also tells us that most people contact us with queries about their code numbers shortly after they receive them or shortly after their first pay day in the new tax year. It is likely that you too will notice an increase in contacts from your clients at these times.

In order to provide the best service we can at these times we will be setting up a special lo-call helpline. It will be open from 8am to 10pm 7 days a week from mid January to mid February and from early April to early May. The helpline number will be given on the leaflet issued with the coding notices.

Self assessment taxpayers outside PAYE will, of course, not directly be affected by these changes until returns for the year ended 5 April 2001 are issued. But the effect of these changes may need to be taken into account when considering payments on account of liability in January and July 2001.

Children's Tax Credit

The children's tax credit, designed to provide better targarted support to families with children, will be introduced from 6 April 2001. It will be available to families with one or more children, and will be worth up to £416 off the tax bill -more than twice the current value of the married couple's allowance.

The credit can be claimed by families (including single parents and married or unmarried couples) who have one or more children under the age of 16 living with them. For couples where neither is a higher rate taxpayer, it will be open to them to choose to allocate the whole credit to either of them or to share it equally between them. Any surplus credit that one spouse or partner cannot use can be passed to the other.

To target the benefit of the new credit on the families that need it most, it will gradually be withdrawn if the person claiming it is a higher rate taxpayer. Those who are affected by these withdrawal provisions will not be able to transfer the credit to their spouse or partner.

Although the new credit does not come into effect until April 2001, we will be sending out claim forms and explanatory notes in the summer of 2000 to around 8.5m people who had either MCA or APA in their 1999-2000 code number. We are unable to target the issue of these forms to just those taxpayers with children. We no longer hold such information on our records and it was not possible to match our records with those people who claim child benefit. We will be consulting on the form and notes with interested parties and we will be testing both on potential claimants to ensure that they are easy to complete and understand.

We will also be asking those wishing to claim the credit to return the claim form to us promptly. This is because we would like to process as many claims as possible by the end of December so that the credit is included automatically in the 2001-2002 code numbers that we will start issuing in January 2001. But whenever taxpayers claim we will, of course, do our best to process their claims promptly.

We are still putting together our plans for publicising the introduction of the new credit and for providing a dedicated helpline to assist people who have queries about entitlement or just need advice about completing the claim form.

Self assessment taxpayer outside PAYE will first be directly exposed to this new relief with the issue of returns for the year ended April 2002.

Our staff will be trained and given detailed procedural guidance on how the new system will operate in April/ May 2000. Before that, they will only be able to deal with basic queries about CTC. We will, however, provide a further and more detailed update on the new credit in Tax Bulletin early next year.

! This Article Is No Longer Current (Deleted Index 2002) (Superseded by BIM31000 onwards)

INTERACTION OF TAX LAW AND ACCOUNTANCY PRACTICE

The last article on this subject appeared in Tax Bulletin 40 (April 1999, page 636). We have been asked to clarify some points arising from that article, and also from our Press Release of 20 July 1999 concerning the decisions in Herbert Smith v Honour (Tax Leaflet 3576) and Jenners Princes Street Edinburgh Ltd v CIR (1998) SpC 166.

Allowability of provisions for tax purposes

Our view can be summarised as follows. A provision made in accounts will be allowable for tax purposes if (and only if):

• it is in respect of allowable revenue expenditure (and not, for example, in respect of capital expenditure);
• it is required by UK generally accepted accounting practice (‘GAAP');
• it does not conflict with any specific tax rule governing the time at which expenditure is allowed;
• it is estimated with sufficient accuracy.

Where the first three bullets are satisfied but the fourth is not then only a sufficiently accurate estimate is allowable for tax purposes.

Accuracy of provisions and other estimates

Whether provisions and other estimates included in accounts are sufficiently accurate is ultimately a question of fact for the Commissioners, to be determined by them after considering all relevant evidence. This means that it is in the first instance a matter for Inspectors, in the course of any enquiry they make into a return, to consider the accuracy of provisions and other estimates. Inspectors may wish to ask what factors the directors or business proprietors took into account in arriving at the figure, and what information was available to them.

Some practitioners have suggested that one effect of the Herbert Smith decision is that the Inland Revenue has no right to enquire into the factual accuracy of entries in company accounts which have been signed off by directors and auditors. We do not accept this.

For self-assessment tax years or accounting periods we have an explicit right to enquire into any return to check that it is correct and complete. For pre-SA periods the Inspector had to be satisfied that a return was correct and complete before making an assessment. Usually the only way we can check if a return is correct and complete is by looking at the underlying evidence.

Paragraph 25 of Schedule 18 FA 1998 governs the scope of an enquiry into a company return for CTSA accounting periods. It extends to anything contained in the return or required to be contained in the return. Accounts form part of the return and entries in the accounts can be included in the scope of an enquiry.

We can therefore check for the factual accuracy of any entry in the return, but ultimately, matters of fact are for the Commissioners to determine, whatever certificates or reports appear on accounts.

We accept that sometimes absolute accuracy is impossible, so that there is no single `right' figure. Directors and business proprietors have a responsibility when preparing accounts to make judgements, and there will often be a range of possible answers within which their own business expertise will be the main factor affecting the final answer. What we expect them to do in arriving at an estimate is to exercise their judgement in a reasonable manner, taking into account the information reasonably available to them and other relevant factors including their own business expertise. If they have done this, and arrived at a result that accords with the requirements of UK GAAP, then Inspectors cannot substitute a different figure just because they might have exercised their own judgement differently.

UK GAAP and entries in accounts

Whether entries in accounts accord with UK GAAP is also, so far as relevant to the computation of taxable profits, a question of fact for determination by Commissioners. If there is a dispute on this issue the Commissioners would expect to hear expert accountancy evidence, as they did in cases such as Johnston v Britannia Airways Ltd (67 TC 99). Thus the same considerations apply to this issue as regards enquiries by Inspectors as to the issue of accuracy (see above). Whatever certificates or reports appear on accounts are not conclusive as far as the computation of taxable profits is concerned.

Provisions and specific tax rules

Taxpayers may need to consider whether a provision includes elements that are affected by specific tax rules. For example, Section 43 FA 1989 provides that in computing taxable profits no deduction may be made for the remuneration of directors or employees unless that remuneration is `paid' (as defined for Schedule E/ PAYE purposes) during the accounting period or within 9 months of the end of the accounting period. This means that if a provision, such as a provision for foreseen losses on a long-term contract, includes an element in respect of employees' remuneration, that element must be disallowed to the extent that the remuneration is not `paid' within 9 months of the end of the accounting period.

Provisions disallowed in settled years

There may be cases where provisions have been disallowed in computing profits for years which are now settled, but where on our view of the law following Herbert Smith and Jenners an accurately computed provision ought to have been allowed. Where this has been done we accept that an adjustment can be made to the earliest open year so that at the end of that year the cumulative position reflects our current view.

Example (This example assumes that all provisions have been estimated with sufficient accuracy.) A construction company enters into a long-term contract in 1995. By the time the directors come to prepare the 1996 accounts it is clear that the contract will make a loss. In those accounts they make a provision of £100,000 which on our current view of the law ought to have been allowed. However, after negotiations only £15,000 was allowed for tax, on the grounds that the remaining £85,000 was an `anticipation of loss'. The tax position for 1996 was finally settled in 1998. In the 1997 accounts the directors make a further provision of £50,000, and in the 1998 accounts a further provision of £20,000, both of which ought to be allowed on our current view of the law. The tax position for both years is still open. For 1997 the company can claim not only the provision of £50,000, but also (by way of a computational adjustment) the £85,000 disallowed for 1996. For 1998 the company can claim the provision of £20,000.

Error or mistake relief claims for settled years

Where there has been an error or mistake in a claim a supplementary claim may be made under Section 42 TMA 1970 within the time limit for making the original claim. For example where a claim has been made to carry forward a trading loss it may be possible to make a supplemental claim to increase the amount of loss carried forward. The normal rules apply to any such claim.

Where tax has been overpaid as a result of an `error or mistake' in a return, a claim for relief may be made under Section 33 TMA 1970. The normal conditions will apply to any such claim. One of these conditions is that no relief shall be given where a return was made in accordance with the `practice generally prevailing' at the time the return was made. We have been asked how this applies to returns made before the Herbert Smith and Jenners decisions.

Herbert Smith concerned the supposed rule that neither a profit nor a loss could be anticipated. We accept that owing to the uncertainty as to the scope of this rule there was no `practice generally prevailing' on this issue. Thus where a provision was disallowed in the past on the grounds that it caused a loss to be anticipated we will not refuse a claim under Section 33 on the grounds of `practice generally prevailing'. The remaining conditions of Section 33 will have to be satisfied before any relief is given.

Jenners concerned the interpretation of Section 74(1)(d) ICTA 1988: the Revenue argued that this subsection prohibited provisions for repairs to premises. This view was shared by most leading textbooks and commentators. In our view, therefore, there was a `practice generally prevailing' to this effect up to the time the Jenners decision was given on 29 June 1998. This means that in our view the Jenners decision cannot be used to support a claim under Section 33 where the relevant return was submitted before 29 June 1998.

E-COMMERCE - TAX IN THE ELECTRONIC AGE

E-commerce is revolutionising the way in which business and Government is conducted, a revolution that is happening at an unprecedented pace. The Government is committed to ensuring that business in the UK is able to benefit from the changes taking place and to achieving the Government's goal of `creating in the UK the best environment in the world in which to trade electronically by 2002'.

The Government has set out clear aims for e-commerce and for egovernment in the UK. And it has drawn up strategies to achieve them. Its broad policies on the taxation of ecommerce and the principles which should be applied to it have been supported by business.

On 26 November the Government published a paper, `Electronic Commerce: The UK's Taxation Agenda', detailing the work the Inland Revenue and HM Customs and Excise are doing to meet these objectives. A copy of the paper is enclosed in CD ROM format for subscribers of Tax Bulletin. The paper can also be accessed on both the Revenue's and Customs' web sites at:

InlandRevenue: www.inlandrevenue.gov.uk/ebu/ecom.htm

Customs and Excise: www.hmce.gov.uk/bus/info/e-comm.htm (Link no longer available)

Creating the climate for growth

The Government is committed to making sure that taxation is not a barrier to the growth of e-commerce, but rather fosters a climate in which e-commerce can grow. A package of measures has been introduced, and more are proposed, which demonstrates the strength of this commitment and ensures that enterprise, growth and investment are encouraged in the UK. These play a vital part in working towards the Government's goal.

International co-operation

But e-commerce is a truly global phenomenon, and international debate and co-operation have been crucial to the progress which has been made on finding global solutions to the taxation issues thrown up by ecommerce. The Government recognises that international consensus is needed to give business certainty and avoid double and unintentional non-taxation and has been playing a leading role in work in international fora.

Modernising tax administration

The Inland Revenue and Customs are in the forefront of the move to Information Age Government outlined in the Modernising Government White Paper. Along with making greater use of technology to help deliver the Government's vision of services available 24 hours a day seven days a week where there is demand, they are acutely conscious of the need to improve the content of the information and services they deliver, as well as the channels through which it is delivered. And the plans for the introduction of contact centres providing customers with interactive, multi-media access to Government are a clear illustration of this drive.

Both the Inland Revenue and Customs are introducing Internet filing of customers' returns, and the first electronic submissions will be possible during 2000-2001. And the Government intends to offer a discount on tax returns filed over the Internet as announced in Budget 1999. Further details will be announced in Budget 2000.

The pilot partnership represented by Business in Government aims to provide a `one-stop-shop' for people setting up in business. This interactive, web-based service provides step by step guidance through customers' obligations and entitlements, making government more user friendly. It is only one example of the close co-operation between the Inland Revenue and Customs in the development of electronic services and demonstrates joined-up government in action; a way of making it easier for their customers to do business with them - saving everyone time and money.

Challenges to tax compliance

The development of e-commerce does not just present opportunities for governments and business -there are also challenges. And the Government recognises that e-commerce poses risks to tax administration and compliance.

The Government will continue to work on these issues to ensure that a robust compliance regime can be applied to the e-commerce environment. And more positively, the use of developing technology will make it easier for taxpayers to comply with their tax obligations, complementing the Government's view that encouraging and assisting taxpayers is the most effective way of maximising voluntary compliance.

The risks to compliance are not solely a concern of the Government. Business too has an interest in ensuring a level playing field where all are aware of their rights, but at the same time comply with their obligations. The role of business in consultation with the Government has been important in tackling the issues raised by e-commerce.

The tax rules

A consistent message from business has been that clarity of the tax rules for e-commerce is a top priority, and businesses that trade internationally need to be certain what rules will apply and how they will be applied. At the same time Government needs to ensure the rules work in a way that protects tax revenues. But the globalisation of trade brought about by e-commerce, and the question of achieving effective application of the tax rules to international e-commerce mean that it is not possible for any country to act unilaterally to provide this certainty.

The Government is working with its international partners to provide clarification in a number of areas by the end of 2000. It is, for example, playing a leading role in work with them to agree a clear definition for place of consumption -a key concept in the operation of VAT, to ensure consistency in treatment of electronic and conventionally delivered services; and to clarify the interpretation of the `permanent establishment' concept in an electronic environment and how certain income should be classified for direct tax purposes.

The business community has indicated that some of these issues need speedy clarification but in other areas the Government should not act too hastily to change long standing and widely accepted concepts, since changes brought in too rapidly might work inappropriately as technology develops. The Government agrees with this analysis and is continuing to work to resolve immediate issues while monitoring closely how developments in technology will affect the international tax rules and UK tax revenues, so as to be ready to adapt any of the rules in the future should this become necessary.

Summary

The Government recognises that ecommerce presents both challenges and huge opportunities for taxation and tax administration. It is actively exploring and introducing ways in which the tools and techniques of ecommerce can assist taxpayers in their dealings with government, while also contributing fully to the targets for digital government. At the same time the Government has developed its policy for the taxation of ecommerce and is working, with business and its international partners, to resolve and clarify particular issues and establish consensus on those of international significance. This work is playing an important part in achieving the Government's strategy for the success of e-commerce in the UK.

Interpretations

(Superseded by CA32224)

INDUSTRIAL BUILDINGS ALLOWANCE -TRADE WHICH CONSISTS OF THE STORAGE OF GOODS OR MATERIALS PART OF A TRADE

The decision of the High Court in the case of Bestway (Holdings) Ltd v. Luff (70 TC 512) has altered our view on the meaning of “part of a trade” and a “trade which consists in the storage of goods or materials” in relation to industrial buildings allowances.

Part of a trade

To qualify for IBA the building or structure must be in use for the purposes of a qualifying trade. The qualifying trade does not need to be the whole of the trade carried on, it can be a part of the trade (Section 18(2) CAA 1990).

We previously took the view that anything done in the course of a trade is a part of the trade for this purpose.

Bestway shows that this view was too wide. The Court held that although the activities in question do not need to be self-contained, they must be a significant, separate and identifiable part of the trade carried on.

A trade which consists in the storage of goods or materials

A building or structure in use for the purposes of “a trade which consists in the storage of goods or materials” will qualify for IBA if one of the further conditions in Section 18(1)(f)(i) to (iv) is satisfied.

Although we did not previously try to define what is meant by this phrase, we said that the main test was whether the further conditions in Section 18(1)(f)(i) to (iv) were satisfied, for instance a warehouse used by a steel stockholder to store its stock would qualify for IBA if the goods stored would subsequently be used in the manufacture of other goods or materials.

The decision in Bestway clarifies the meaning of this phrase. The Court held that the determining factor in deciding whether the goods are stored is the purpose for which they are kept or held. A building is only used for storage if the purpose of keeping goods there is their storage as an end in itself. There is no such use for storage if the goods are kept there for some other purpose. Storage which is merely a necessary and transitory incident of the conduct of the business is not sufficient. The decision in Crusabridge Investments Ltd v Casings International (54 TC 246) was distinguished as the collection and storage of tyres was an essential part of the business in that case.

Consequences of the decision in Bestway

The main impact is likely to be on thea wholesale trades where we have previously accepted, in the particular circumstances of the case, that there was a qualifying part trade of storage of goods or materials which would be used in the manufacture of other goods or materials or subjected in the course of a trade to a process. In order for the building or structure to continue to qualify for IBA, the storage must form a significant, separate and identifiable part of the trade and be conducted as a purpose and end in itself, not just a necessary and transitory incident of the conduct of the wholesale business.

Each case will have to be considered on its own facts. The sort of business which may be affected by the Bestway decision is a builders merchant where it has previously been accepted that a building or structure in use for the purposes of the trade which consists in the storage of building materials that are to be used in the manufacture of other goods or materials would qualify. Depending on the facts, such storage may no longer qualify the building or structure for IBA.

Where claims to IBA have been accepted for previous periods in accordance with our previous prevailing practice and IBA ceases to be due as a result of the revised view of the meaning of “part of a trade” and a “trade which consists in the of storage of goods or materials”, the revised view should be applied to claims of that taxpayer for chargeable periods ending after 31 December 1999. Claims for periods ending on or before 31 December 1999 in respect of the expenditure that has been agreed as qualifying for IBA under our previous prevailing practice will be allowed subject to any other changes in the nature and conduct of the trade that may affect entitlement to IBA for those periods, such as the admission of retail customers or the outsourcing of supplies.

(Superseded by BIM41050 onwards)

REVERSE PREMIUMS: SECTION 54 AND SCHEDULE 6 FINANCE ACT 1999

We have received a number of enquiries about the effect of the provisions for taxing reverse premiums now enacted as Section 54 and Schedule 6 Finance Act 1999. To assist practitioners and the public, we publish the more commonly asked questions, and the Revenue's view of the answers. These break down into four areas:

(1) the meaning of `payment or other benefit';

(2) the distinction between fitting out and building costs;

(3) the types of transaction affected; and

(4) the commencement rule.

(1) The legislation charges `a payment or other benefit by way of inducement' to take an interest in land. Do all inducements create a tax charge?

The most obvious form of inducement is a cash payment by the landlord to the tenant, but there are many others. A landlord may give a tenant some benefit other than cash or pay a sum to a third party to meet a liability of the tenant. The commonest forms of commercial inducement include:

• allowing the tenant to occupy for a rent free period;
• a contribution to the tenant's costs, such as start up, fitting out or relocation;
• assumption by the landlord of the tenant's liabilities, such as any continuing obligation to pay rent under an old lease, or payment of a capital sum to terminate it.

Not all these inducements create liability under Schedule 6. The legislation brings into charge only benefits procured by actually laying out money. It does not, very broadly, catch inducements representing amounts foregone or deferred by the provider.

Apart from straightforward cash payments, the commonest forms of taxable inducements include:

• contributions towards specified tenant's costs, such as fitting out, start up or relocation;
• sums paid to third parties to meet obligations of the tenant, such as rent to a landlord under an old lease, or a capital sum to terminate such a lease;
• the effective payment of cash by other means, for example, the landlord's writing off a sum which the tenant owes.

Examples of inducements not caught, because they do not represent actual outlay, are:

• the grant of a rent free period of occupation;
• replacement by agreement of an existing lease at a rent which a change in market conditions has made onerous by a new lease at a lower rent;
• replacement by agreement of an existing lease containing some other provision the tenant has found onerous by a new lease without the onerous condition.

(2) You say a contribution towards a tenant's `fitting out costs' is a reverse premium charged by the legislation. What do you understand by `fitting out costs'?

`Fitting out costs' are expenditure on equipping a building with tenant's or trade fixtures or chattels. The cost of these items is usually the responsibility of the tenant. If a

landlord incurs them, either directly, by paying for their supply and installation, or indirectly, by reimbursing the tenant for its expenditure, the tenant has received either an `other benefit' or an actual payment charged by the legislation.

What if the landlord incurs the expenditure on fitting out, but charges a higher rent to reflect the enhanced value to the tenant of a fully fitted out building?

If the tenant effectively reimburses the landlord for trade or tenant's fixtures or chattels, he is not receiving any benefit, and so there is no charge under Schedule 6.

What if the landlord reimburses the tenant for the cost of assets otherwise qualifying for capital allowances in the tenant's hands?

The new legislation does not charge any contribution which reduces the tenant's qualifying expenditure under Section 153 Capital Allowances Act 1990. Such a contribution may still entitle the payer to claim capital allowances if he meets the terms of Section 154 CAA 1990.

What if the parties agree that the tenant should be responsible for completing the building, and the landlord reimburses all or part of the cost? Say the tenant wants a specialised type of roof which it undertakes to have installed, and the landlord contributes in cash what it would have paid for a standard roof.

If a contribution is effectively towards the cost of completing the building, it is not chargeable under the new provisions. The issue of principle here is that the cost to the landlord of acquiring a building for letting is not a benefit by way of inducement to the tenant to take a lease. If, say, a landlord pays £1 million to a property developer to buy a finished building to rent out, that £1 million is clearly not an other benefit by way of inducement to any future tenant to take a lease. The same result must follow if the landlord pays the £1 million to a builder to construct the building on bare land; or pays £750,000 to the builder for a roofless structure, and £250,000 to the intended tenant which the latter must spend on installing a roof.

Would it make any difference to that answer if the landlord reimbursed the extra cost of the specialised roof?

No, because in either case the landlord is simply paying for the completion of the building. A roof, whether standard or specialised, is not a tenant's fixture, and hence the landlord's meeting its cost is not an inducement to the tenant to take a lease.

You say a landlord's contribution to fitting out costs is a reverse premium chargeable under Schedule 6, whereas a contribution to permit the tenant to complete the building is not. How do you distinguish between the two types of expenditure?

It will normally be quite clear what expenditure completes the building, and what procures trade or tenant's fixtures or chattels. As a general guide, the former is likely to increase the value of the reversionary interest, while the latter will be valueless when the lease comes to an end. Another means of distinction may be that the former will fall to be taken into account in computing market rent on a rent review. The latter will not.

(3) The legislation applies where a payment is made or an other benefit is provided by way of inducement in connection with `a transaction'. It defines a `relevant transaction' as one whereby a person becomes `entitled to an estate or interest in, or a right in or over, land'. Does this mean there will be a charge if the transaction is, say, the sale of a freehold, or the assignment of an existing lease?

The provisions you refer to are in paragraph 1(1)(b) of Schedule 6. To determine whether you have a chargeable reverse premium, you must also consider paragraph 1(1)(c). This makes clear that you will have a chargeable reverse premium only if the sum is paid or other benefit provided by the `grantor' of the estate etc., or by a person connected with the grantor, or by a nominee or person acting on the direction of either.

The use of the word `grantor' means there can be no charge when a freehold is conveyed. A lease or other subordinate interest in land is `granted' because it is created out of a superior interest in that land which the grantor holds. A freehold, however, is the highest interest in land a person may hold. Thus it cannot be granted, and there is no `grantor' for the purposes of the subparagraph.

The most common occasion of charge will be a payment by way of inducement by a landlord (the `grantor') to a tenant to take a new lease. It may also apply, however, where an existing tenant pays a new tenant an inducement to take over the remaining term of an existing lease; but if and only if the old tenant is connected with the landlord (‘the grantor') or acting as nominee or at the direction of the landlord, or of a person connected with the landlord.

(4) The provisions take effect from budget day 9 March 1999. The commencement rule in Section 54 says the provisions of Schedule 6 apply to a reverse premium received on or after 9 March 1999, unless it is a payment or other benefit to which the recipient was entitled immediately before that date. It goes on to say that in determining whether you are entitled to a payment before 9 March, you should take no account of arrangements made on or after that date. How does this work in practice?

It may be helpful to consider three possibilities:

• If an agreement for a lease were made on 8 March, without provision for a reverse premium, and the arrangements were varied on 9 March to incorporate a reverse premium of £1 million, that sum would be chargeable.
• If an original agreement of 8 March provided for a reverse premium of £1.5 million, but the arrangements as varied on 9 March increased the sum payable to £2 million, £0.5 million would be chargeable.
• If an agreement for a lease were in place by 8 March providing for payment of a reverse premium of £1 million, and the lease was granted and the premium of £1 million paid on 9 March, there would be no charge under the new provisions.

miscellaneous

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

PENSION SCHEMES OFFICE: SYNOPSIS OF UPDATES

The Pension Schemes Office (PSO) has issued a further four Updates to all customers on the PSO Mailing List; Updates No 54 to 57 issued on 30 June, 26 August, 16 September and 30 September respectively.

Update No 54 announced two new options to improve flexibility in pension provision. The first allows approved money purchase schemes and buy-out contracts to defer the purchase of an annuity and in the meantime pay pensions by income drawdown. The second option involves a relaxation whereby benefits paid for by additional voluntary contributions may start at any time between age 50 and age 75 (or earlier if a person leaves employment because of incapacity) regardless of whether the scheme member retires or leaves pensionable service.

Update No 55 is concerned with wholly insured schemes where loans are made by a life office direct to an employer in relation to the scheme or to a company associated with such an employer. It advises that the PSO will in future check whether the granting of security by the scheme trustees was a judicious act at the time the loan was made.

Update No 56 covers numerous customer service matters affecting the PSO and its operations.

Update No 57 advises of the issue of a revised version of the Personal Pension Scheme Guidance Notes IR 76. This largely replaces the old 1991 edition but certain paragraphs will continue to apply pending the issue of the two outstanding chapters, ie Parts 11 and 12.

Inland Revenue Statements of Practice and Extra-Statutory Concessions
issued between 1 October 1999 and 30 November 1999

Extra-Statutory Concession

Number	Title	Date of Issue
B53	Non-Residents and Gains on Life Insurance Policies	23/ 11/ 99

Statements of Practice

There have been no Statements of Practice issued in this period.

You can get copies of SPs and ESCs from the Inland Revenue Visitors Information Centre, Ground Floor, South West Wing, Bush House, Strand, London WC2B 4RD. or by ringing the Inland Revenue Enquiry line on 020 7438 6420.

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 issued 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 or by e-mail to jeremy.sherwood@ir.gsi.gov.uk. 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.

 

© Crown Copyright 1999

 

 

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