Inland Revenue Tax Bulletin - Issue 46


Contents

Editorial

This is my first issue as Editor of Tax Bulletin. In the last edition my predecessor told you about a new joint initiative with CIOT and ICAEW called Working Together. A Special Edition of the Tax Bulletin will be published later this month containing information and guidance on a range of issues which the initiative has highlighted. You will be sent a copy in the normal way.

-Sarah Guerra

Employee Share Plans: Conditional Shares and Related Topics

The provision of shares or options over shares by corporate employers, as part of their remuneration strategy for their employees and directors, is a well-established practice. Where shares are provided directly to an employee or director there is normally a Schedule E income tax charge under S19(1) ICTA 1988 on the value of those shares. Sometimes restrictions are placed on the shares at the time they are provided. A common restriction is the risk of forfeiture, so that the employee has an interest in the shares but that interest can be lost. These shares have a reduced value while they are subject to the risk of forfeiture but the value increases when the risk is lifted.

Legislation was introduced in FA 1998 in relation to the treatment of these restricted shares (also known as ‘conditional shares’). This can be found at Ss 140A-H of ICTA 1988. There were further changes in FA 1999 that were incorporated into those sections of ICTA.

Where an employee receives shares that are subject to the risk of forfeiture the normal income tax charge is exempted by Section 140A(3) ICTA 1988, unless the shares can still be subject to the risk of forfeiture more than five years after they were acquired. When the risk of forfeiture is lifted, or the shares are disposed of, a Schedule E charge arises on the value of the shares less any amounts paid for them or already charged to income tax. S140C defines the cases where the interest in shares is to be treated as only conditional.

Previous articles on these topics can be found in Tax Bulletins Issues 35 (June 1998) and 36 (August 1998). Since then we have been asked a number of questions about Ss140A-H ICTA 1988 as they now stand. We consider that these are of general interest and publish our answers to them here.

We are also taking this opportunity to deal with some other questions of general interest in the area of employee share remuneration, within the existing legislation; including PAYE, National Insurance and Capital Gains.

Conditional Shares(Sections 140A-H ICTA 1988)

Comparison between Sections 140C(3) and 140C(3A) ICTA 1988

Q1. To fall within S140C(3) ICTA 1988, it is necessary for the articles of association to require that an employee who leaves employment must offer the shares for sale. This implies that it is not possible to differentiate between different classes of leavers. For example, some employers will want all leavers to sell their shares while others will be content to allow employees who leave through ill health, disability etc. to retain theirs. In contrast, the wording of S140C(3A) appears to allow some discretion in this matter. Does the Inland Revenue allow the same discretion as to which employees must sell their shares under both subsections of the Act?

A. We do not draw any distinction between the ‘requirement’ tests in S140C(3) and S140C(3A) and accept that both subsections allow for the possibility of differentiating between classes of leavers.

Misconduct

Q2. The term ‘misconduct’ is used in S140C(3A) ICTA 1988. Many share plan rules refer to ‘termination for cause’; does the Inland Revenue interpret ‘misconduct’ to include ‘termination for cause’ for this purpose?

A. We would agree that the term ‘termination for cause’ falls within the scope of S140C(3A).

Bankruptcy

Q3. Many companies require that employees who own shares must sell them for a price determined by a formula if they cease employment. Provided these provisions are contained in the articles of association, this alone will not make the shares conditional. However, such companies often provide that the shares must be sold if the employee becomes bankrupt. This would not, on the face of it, fall within any of the exemptions of S140C(3) ICTA 1988. A director who was made bankrupt would have to cease to be a director, because of the prohibition in the Company Directors Disqualification Act of 1986, but could normally continue as an employee of the company.

This means that if shares owned by an employee were conditional solely because of a bankruptcy condition, they would not be conditional if the employee were also a director, because they would now fall within the exemption of S140C(3).

Would the Inland Revenue propose an amendment or introduce a concession that a bankruptcy provision contained in the articles of association would be ignored for the purposes of determining whether the shares were conditional for an employee who is not also a director?

A. We can confirm this interpretation of the legislation. There are no plans to introduce a concession or to amend the legislation.

Drag-along rights

Q4. Some shares are subject to ‘drag-along’ rights. These rights typically require that a minority shareholder must sell some or all of his shares if other shareholders sell their shares to a third party. The price for such a sale is normally the price paid by the third party and, as such, is not normally discounted to take account of a minority interest, for example. Would such ‘drag-along’ rights, on their own, make the shares conditional?

A. Conditions may apply which potentially require shareholders to sell their shares when the majority shareholders sell out and at the same price as those shareholders. Where that requirement is, in effect, a requirement to offer shares at a genuine arms length price then the test in S140C(1)(b) would not be met so that the provisions of S140A would not apply.

Articles of Association

Q5. The term ‘articles of association’ is used in S140C ICTA 1988. How does the Inland Revenue interpret this term in relation to foreign companies that may not have articles of association, but have other documents such as ‘bye-laws’? How does this interpretation fit with the Treaty of Rome?

A. The Inland Revenue does not treat agreements outside articles of association as if they were in articles of association for the purposes of S140C. The exemption in S140C(3) is not extended to foreign company equivalents.

With regard to the Treaty of Rome, the Revenue treats EU resident companies no differently from UK resident companies that have forfeiture rules outside of Articles of Association.

Q6. The term ‘articles of association’ is also found in paragraph 12 of Schedule 9 ICTA 1988, in the context of the approved share scheme legislation. The Inland Revenue interprets the term to include equivalent foreign documents for this purpose. What is the reason for this difference between the two circumstances?

A. The reason for the difference between the interpretation for S140A and approved scheme legislation purposes is the difference in rationale for these two parts of the Taxes Act.

If employees receive shares on terms that mean those shares may be forfeit, it is right that the full value of the shares should be treated as remuneration and charged to income tax when that risk is subsequently removed. The Government was, however, concerned that employees in many small private companies, which have for a number of years been awarding shares, would be caught by S140A because of pre-emption rights in the articles of association. Where this represented the only risk of forfeiture, it has always been accepted that the income tax charge arose on the value of the shares when they were received. As a result it was decided to exclude from the new provisions the situation where an employee acquires shares that are conditional solely as a result of conditions contained in the employing company’s articles of association. The limits of the exemptions in S140C as interpreted by the Inland Revenue do, generally speaking, exempt those small private companies with pre-emption rights.

The purpose of paragraph 12 Schedule 9 is to ensure that the shares that employees receive through approved schemes are normal shares on normal terms. This is reflected by the requirement that they must not be subject to restrictions, unless those restrictions attach to all shares of the same class. For this purpose the restrictions are not only those included in the articles of association but also those imposed by other documents or agreements (paragraph 13 Schedule 9). This applies equally to UK and foreign companies.

Company leaving the Group

Q7. Some companies have articles of association that require employees to sell their shares if the subsidiary that they work for is sold or ceases to be a 51% subsidiary. This does not appear to fall within the exemption in S140C(3) ICTA 1988, since the employee does not cease to be an employee. Instead the company that he works for ceases to be a group company. Would this situation mean the shares were conditional for the purposes of S140A?

A. Where the requirement is, in effect, a requirement to offer shares at a genuine arms length price, the test in S140C(1)(b) would not be met so that the provisions of S140A would not apply.

It would be unusual for the requirement to meet the test in S140C(1)(b), but where that happens, the acquisition of shares would fall outside the exemption in S140C(3) and therefore within the scope of S140A.

Interaction between S140A and S162 ICTA 1988

Q8. Section 140A(3) ICTA 1988 contains a reference to Section 162 ICTA 1988. Does this apply to the difference between the full market value of the conditional shares and the amount paid, or merely act to retain the charge which would otherwise apply under S162?

A. The provisions at S140A do not extend the circumstances in which a S162 charge can apply to shares acquired at an undervalue.

The normal rules charge which arises under S19 takes priority over any S162 charge because of the operation S162(11). S140A then goes on to displace the S19 charge in certain circumstances but it does not extend the scope of S162. It merely retains the S162 charge that would apply in normal circumstances.

Interaction between S140A ICTA 1988 and S78/S79 FA 1988

Q9. Many share plans operate over shares in subsidiary companies. These share plans may be operated for genuine commercial reasons and in some cases the shares that the employees own will be conditional.

If an employee sells the shares then an income tax charge would appear to be due under both S79 FA 1988 and S140A ICTA 1988. Each of these sections contains provision to allow a tax charge under the other in calculating the tax charge. What is the correct treatment when the tax charge arises at the same time under both sections?

A similar situation can arise in respect of a tax charge under S78 FA 1988, where share rights are altered. For example, a company’s share capital may be changed on a flotation. This may give rise to a S140A ICTA 1988 charge, if the shares cease to be conditional, and a S78 FA 1988 charge on a variation in the rights attaching to those shares. How does the legislation apply such a case?

A. Section 79 (6A) FA 1988 provides that the S79 charge will be reduced by any amount charged under S140A ICTA 1988 if the S140A event occurs before the time of the S79 chargeable increase.

The deductible amounts for the S140A charge in respect of events for which there is a charge under S79 (and S78) FA 1988 are for those events which have occurred not later than the event giving rise to the S140A charge. This order of priority is found at S140A(7)(c).

Therefore, where a S79 charge arises at the same time as the S140A charge, the full S79 charge will be taken, and that charge will be deductible in computing the S140A charge.

Where a chargeable event for S78 FA 1988 purposes occurs at the same time as the risk of forfeiture is lifted, the full S78 charge will be taken and that charge will then be deductible in computing the amount for S140A.

PAYE, NICs & S144A

Section 144A ICTA 1988

Q10. Why can’t tax not recovered from an employee within the 30-day time limit under S144A be treated as a beneficial loan, rather than a taxable benefit in kind. Alternatively, can the 30-day time limit be extended to 60 days?

A. A tax charge arises under Section 144A if the employer was obliged to account for PAYE tax, which could not be deducted from actual pay, and the employee has not made good to the employer the tax within 30 days. S144A was introduced in Finance Act 1994 in association with Ss 203B-L. Following representations from employers and advisers, own company shares were granted an exemption when these rules took effect in May 1994.

Subsequently the Inland Revenue saw much evidence that the shares exemption was being used for avoidance purposes and hence the exemption was lifted in November 1996.

There are no plans to issue concessions on S144A, such as an extension of the 30-day period, nor to treat tax not recovered by an employer as a loan rather than a benefit-in-kind.

An employer who is properly advised will ensure the PAYE tax is recovered within the 30 day period and it would be neither equitable nor consistent for the Inland Revenue to introduce concessions for less well advised, or less compliant, employers/employees.

Right of the employer to recover PAYE from the employee

Q11. When a notional payment is made, SI 1994 No 1212 Regulation 7 allows an employer to recover PAYE from any other cash payments made in the remaining part of the tax month. The employer does not have a statutory right to recover the PAYE from payments made in, say, the following tax months.

This could cause practical problems, for example where an employee exercises an option after the payroll cut off date for the month. Could the recovery period be extended indefinitely so that PAYE paid by the employer (and not recovered) is effectively treated as a loan? This would not change the timing of the PAYE paid by the employer or the S144A ICTA 1988 tax charge.

Failing this, could the period for the recovery of the PAYE be aligned with National Insurance, where the employer can recover the National Insurance from the employee at any time in the same tax year?

A. The Inland Revenue does not advise employers how to organise their internal procedures but employers are required to meet obligations which arise under the PAYE regulations.

As already stated in the context of S144A, there are no plans to extend the recovery period for PAYE from the employee, nor to align with recovery of National Insurance. That would only be a partial solution because it would not solve difficulties that could arise towards the end of the tax year.

When FA 1994 legislation was enacted, and the Notional Payment regulations laid, it was made clear that employers and employees were free to adjust their relationships to allow the employer to recover the PAYE from the employee. The Inland Revenue sees no need to change the present position.

If the recovery arrangements are expressed as a formal loan there will be no S144A charge but a beneficial loan charge will apply, if interest is paid at less than the official rate and the other limits have been exceeded.

Tax Return

Q12. How should the employee complete her self-assessment tax return when tax on a share related benefit has been deducted under PAYE? The P60 will not show the PAYE deducted in respect of the share-related benefit and the employee will not necessarily know the amount of tax that has been deducted. What should the employee do if the employer has failed to operate PAYE?

A. If the employer operated PAYE, on the correct amount of the share income, the income and the associated PAYE tax will be included in the figures on the P60. If required to submit a return, the employee does not need to separate the share income and the PAYE on it from other income or tax, which should be entered in boxes 1.8 and 1.11 on the employment page. In these circumstances, if there is nothing else to go on a share schemes page, the employee should tick the ‘no’ box on the SA return about a share schemes supplementary page. She should also explain in the additional information box at the end of the return that all the share income has been taxed through PAYE and is declared on the employment page.

However, if the employee considers that the ‘best estimate’ on which PAYE was operated is not correct, she should:

  • deduct the ‘best estimate’ from the P60 income figure
  • put the balance in box 1.8 on the employment page, and
  • enter the correct figure in the share pages.

All the tax should still go into box 1.11 on the employment page and an explanation should be given in the additional information space on that page.

If the employer does not operate PAYE on the share income, that income and the tax on it is not included in the P60 and the employee must return the income in the Share Pages of an SA return.

If the employee considers that tax should have been deducted in accordance with S 203J (so that there has been a PAYE failure by the employer), the PAYE regulations permit the employee to claim a tax credit. This should be entered in box 1.11 on the Employment page with an explanation in the additional information box.

If accurate information about the amount chargeable, or the associated tax charge, is not available by the filing date the employee should not delay submitting the return but should include best estimates for the figures with an explanation in the additional information boxes. The employee should ensure accurate information is submitted as soon as it becomes available.

Readily convertible assets (RCAs) -- Long stop provisions

Q13. Many new start up companies contain provisions in their articles of association or other agreements that if there has not been a flotation or sale by a ‘long stop’ date then:

  • The minority shareholders can require that the majority shareholders purchase their shares, and
  • The majority shareholders can require that the minority shareholders sell their shares.

This long stop date is typically five to ten years from the date when the original shares were acquired.

Would this arrangement for a long stop provision on its own make the shares readily convertible assets?

A. The definition of an RCA in S203F(2) includes:

‘(g) an asset for which trading arrangements are likely to come into existence in accordance with any arrangements of another description existing when the asset is provided or with any understanding existing at that time’.

Long stop provisions are trading arrangements because the share award is made subject to a provision requiring them to be purchased/sold at a particular point in the future. This represents an arrangement or understanding likely to give rise to trading arrangements. Consequently the shares are RCAs.

Tax Bulletin Issue 36 (August 1998) advised that Shares Valuation Division (PAYE valuations) will assist private companies in the valuation of their shares for PAYE. SVD will consider the precise facts of any case. The long stop provision may be reflected in a lower valuation relative to shares capable of sale immediately after award.

RCAs and delayed sale

Q14. There are share plans that operate in such a way as to prohibit employees from selling the shares for, say, one year from the date of acquisition. This is a feature of some US stock purchase plans. However, the same class of shares will often be traded on a stock exchange and so those awarded to the employees will be readily convertible assets. This means that PAYE will be due when the shares are acquired but the employee will not be able to sell the shares to reimburse the PAYE.

Would it be possible to allow the employee to elect to defer the tax due if the shares cannot be sold in genuine commercial situations?

A. If an employee acquires shares under an arrangement that allows for sale of the shares one year later, the shares will be RCAs either:

  • because the shares are traded on a recognised investment exchange or the New York Stock Exchange; or
  • because the understanding that the shares can be sold in one year is an understanding likely to lead to trading arrangements.

Before the RCA rules were introduced in FA1998, when employees were awarded shares whose sale was restricted for a given period, some employers were unsure about the date, and the correct amount, on which PAYE should be operated.

FA1998 simplified this process and introduced a single method of calculating PAYE, based on a best reasonable estimate of the income chargeable to tax. This provides employers with certainty over the timing of the operation of PAYE, and feedback from employers and advisers has been positive.

A system where the employer’s obligation to operate PAYE could be deferred until some later event would re-introduce the type of uncertainty removed in FA1998. On a practical note, if the sale was delayed 12 months or more, the income would arise in one tax year and the obligation to operate PAYE in a later year. Since PAYE operates on an annual cycle, this would create considerable, and possibly insurmountable, operational problems.

Recovery of PAYE and NICs -- S43 Finance Act 1999

Q15. Section 43 FA1999 introduced exclusions to S140C ICTA 1988 and made those exclusions retrospective to 17 March 1998, when S140C originally took effect. The result is that some companies may have operated PAYE and NICs when, for example, an employee ceased employment.

Can the employer recover National Insurance paid in this situation, now that the tax charge has been removed?

What action should be taken to remove any S144A benefit and allow the employee to recover any income tax over paid?

A. There is no legislative provision that allows for a refund of NICs that may have been paid on the basis that the amounts were properly payable at the time. In this case, this applies to payments made between 9 April 1998 and 27 July 1999 (the date of Royal Assent of FA 1999).

The first year affected by S140A is 1997-98 for which the Self Assessment filing date was 31 January 1999 and the taxpayer was free to amend this return before 31 January 2000. Therefore any Self Assessment that included:

  • a charge on shares now affected by S43 FA 1999;
  • a S144A ICTA 1988 charge;
  • a PAYE credit

could have been amended.

If there is an open SA enquiry, these points can be adjusted when that enquiry is closed.

If the taxpayer missed the 31 January 2000 deadline, or was not in SA in 1997-98, the matter can be dealt with via a claim under S33 TMA 1970. This is because the retrospective nature of S43 FA 1999 means the return was filed on the basis of a misunderstanding of the law.

National Insurance on option rollovers

Q16. SI 1979/591 Regulation 19(1)(zm) includes provisions to exempt from National Insurance gains on the exercise of certain ‘rolled-over’ options. How does the Inland Revenue interpret this provision in practice?

A. There are two things to consider when an option originally granted before 6 April 1999 is rolled over after 5 April 1999.

  • Regulation 19(1)(zl) considers whether there should be any NICs on the event of the rollover itself, by reference to the values prevailing at the time.
  • Regulation 19(1)(zm) considers whether there should be any NICs on the subsequent gain made on the new option, by reference to whether the rollover was conducted at parity.

The first consideration is whether there is any NIC on the event of the rollover itself. Regulation 19(1)(zl) exempts such rollovers from liability provided there is no increase in the total discount. Regulation 19(11) defines ‘total discount’ as:

‘the difference between the total value of the exercise price of the shares that are the subject of the right in question and the total market value of that right’.

If the total discount on the new option is substantially greater, then NICs will be due on the best estimate of the amount of the increase at the time of the rollover. The basis of assessment is given in Regulation 18(17) of the Social Security (Contributions) Regulations 1979. Where the old option has gone underwater since grant and the new option has a nil discount, we do not consider that the ‘total discount’ has increased. Consequently no NICs would be due on the event of the rollover itself.

The second consideration is whether any NICs will arise on the subsequent gain made on the new option. The intention of Regulation 19(1)(zm) is to exempt from liability the gain made on an option rolled over after 5 April 1999, where the first option was granted before 6 April 1999, provided the consideration given for the old option was not in excess of the total market value of the old option, at the time of the rollover.

In summary, National Insurance will not be due on the gain on a rolled-over option where:

  • the original option was granted before 6 April 1999
  • the rollover happens after 5 April 1999
  • the discount, at the time of the rollover, on the new option is not more than on the old option, and
  • the total market value of the shares under the new option, at the time of the rollover, is not more than under the old option.

There have been a few queries on the operation of 19(1)(zm) and we will be clarifying this, by way of an amendment to ensure that it achieves the policy intention. If you are still in doubt you should contact your local Inland Revenue National Insurance Office with the scheme documentation.

Capital Gains

Qualifying employee share ownership trusts (‘QUESTS’)

Q17. Section 69(3A) FA 1989 allows the transfer of shares by a QUEST for the purpose of a S135 (1) TCGA 1992 reorganisation to be regarded as a qualifying transfer. Many reorganisations qualify for favourable capital gains tax treatment under S136 TCGA 1992. However, a transfer of shares for the purpose of such a reorganisation does not appear to be regarded as a qualifying transfer. As such, the transfer of shares in such circumstances would give rise to a chargeable event.

Can a reorganisation under S136 TGCA 1992 be treated in the same way as a reorganisation under S135 TCGA 1992?

A. A Section 135 TCGA 1992 reorganisation involves a transfer of shares by the shareholders in one of the companies involved, even though the new shares and /or securities are treated as if they were the old shares for capital gains purposes by virtue of Section 127-131 TCGA 1992.

Section 136 TCGA 1992 deals with an arrangement between a company and its shareholders in connection with a scheme of reconstruction or amalgamation under which another company issues shares to the shareholders in the first company. The shares in the first company are retained by the shareholders in the first company or cancelled. ‘Shares’ in this context includes debentures. There is no need for the shareholders in the first company to transfer their shares in the situations covered by Section 136 TCGA. In these circumstances there is no reason for Section 69(3A) FA 1989 to mention Section 136 TCGA 1992 and it therefore deals only with transactions within Section 135(1) TCGA 1992.

Section 69(3A) FA 1989 was introduced as a result of the European Union Mergers Directive to remove possible tax obstacles to community-wide business activities and cross-border expansion. The relief was targeted at cross-border transactions as UK companies already had wide scope to reorganise their commercial operations without triggering burdensome tax charges.

Extra-statutory Concession D35

Q18. Extra-statutory concession D35 provides relief from capital gains tax where an employee trust transfers an asset to an employee where the value in that transfer is subject to Schedule E. Does ESC D35 apply where the shares that are transferred are conditional, for the purpose of S140A ICTA 1988, and where no income tax is due on the acquisition of the shares by virtue of S140A(3) ICTA 1988?

A. An employee becoming absolutely entitled to the shares is an event giving rise to a deemed disposal under Section 71(1) TCGA and a charge under Section 140A(4)(a) ICTA 1988. Assuming that the employee is assessable on the full value of the shares on that date, because there is no deduction for the cost of those shares, then the trustees would be exempt from CGT.

Q19. Does ESC D35 apply to assets transferred following the exercise of a share option where the exercise price is nil or a nominal amount?

A. The ESC can apply where exceptionally the employee gives no consideration for the share option and for the shares he acquires on exercise -- assuming that the case does not fall within the last paragraph of the concession. This disapplies ESC D35 where special statutory rules restrict either the liability to capital gains tax or the Schedule E liability. On the face of it, nominal consideration would take the case outside the concession.

Q20. Can ESC D35 be extended to cover situations where an employee has to pay something for the cost of the asset (for example, a nominal amount or an amount equal to the original cost of the asset)?

A. The intention was to keep the ESC as simple as possible. We consider that anything other than a straight exemption would almost certainly require legislation.

The ESC was introduced to help a simple employee benefit or welfare trust which could not in itself be subject to any of the statutory income tax or CGT reliefs where the company in question was to be floated on the Stock Exchange or taken over. The trust’s shares would be distributed gratuitously in advance of this event. In this way the employees could take the maximum benefit from the shares. In this situation one would not expect the employees to pay anything to the trustees for the shares. If however the trustees did require some cash to meet expenses or repay loans, it would be a simple matter for them to retain sufficient shares to meet such liabilities net of tax.

Other Issues

Employee Share Plans & Pensions.

Q21. Can an employee’s profits in respect of shares and share options be included in ‘relevant earnings’ for determining the limits on how much can be paid into a personal pension plan?

A. The definition of ‘relevant earnings’ for this purpose is found in Section 644 ICTA 1988. S644(4)(a) excludes:

‘anything in respect of which tax is chargeable under Schedule E and which arises from the acquisition or disposal of shares or an interest in shares or from a right to acquire shares.’

Therefore the employee’s profit on the shares cannot be taken into account as relevant earnings for a personal pension plan. This reflects S612 ICTA 1988 which was introduced to prevent the artificial manipulation of remuneration for occupational pension schemes for the purposes of boosting both employee contributions and benefit levels .

However, from April 2001, there will be extra scope to contribute to a personal pension plan at desired levels. Under the proposals for defined contribution schemes, members of personal pension plans will be able to contribute up to £3,600 per year without regard to relevant earnings. This is of potential benefit to the vast majority of personal pension scheme members who currently contribute at a far lower level.

Savings-related Share plans: High Value Shares

Q22. Some companies have very high share prices and this means that employees saving relatively modest amounts each month would be unable to buy shares in an approved plan. For example, with a share price in excess of £1,000, an employee saving less than £25 per month under a 3 year savings-related share plan would not have sufficient to buy one share. Would the Inland Revenue consider allowing options to be granted over a fraction of a share to allow companies with high share prices to operate savings-related share option plans?

A. Our understanding of the law, as it currently stands in the UK, is that there is no concept of a fraction of a share and therefore the existing approved share schemes have been unable to accommodate such arrangements.

Reporting of share-related benefits

Q23. What are the time limits for an employer to report share-related benefits to the Inland Revenue?

Could the time limits for reporting share-related benefits be aligned with the P11D return deadlines?

A. The time limits for notification are explained in booklet IR16. In summary they are:-

Approved schemes: -- 30 days from the date of the notice issued by the Board (paragraph 6 Schedule 9 ICTA 1988).

Other awards, including unapproved schemes: -- Generally these are 30 days from the end of the tax year in which the acquisition of the shares, interest in shares, grant of option or conversion occurs (S136(6) and 140G ICTA 1988 and S85(1) FA 1988).

Chargeable events and special benefits: -- 60 days after the date of the event for those amounts chargeable under Ss78 and 80 FA1988 (S85(2) FA 1988).

We do not consider that changing to the P11D reporting timetable would be appropriate because of the nature of the information, and the different way in which it is dealt with in the Revenue.

General guidance on share and share option schemes is available in leaflets in the IR series. We also provide guidance and news of current developments on our website at www.inlandrevenue.gov.uk/shareschemes

(Superseded by CA23782)

Capital Allowances -- Long-Life Assets -- Aircraft Outside The BATA Agreement

In Tax Bulletin Issue 41 (June 1999), we set out the background and terms of an agreement between the Large Business Offices dealing with the airline industry and the British Air Transport Association, BATA. This agreement determined how the long-life asset legislation in Part II Chapter IVA CAA 1990 would apply to jet aircraft with 60 or more seats, used primarily for the carriage of passengers or freight for profit. We also said that discussions were continuing with representative bodies on the treatment of other types of aircraft.

It is now clear that the wide variety of type and the even wider variety of use of aircraft assets outside the terms of the BATA agreement make a further formal agreement of that kind impracticable. However, we have concluded that it is possible to give broad indications of how, in general, we will handle the application of the legislation to various types of aircraft. We believe that this should achieve the desired aims of giving reasonable certainty to the industry as well as minimising the number of individual claims that have to be reviewed in detail.

The long-life asset rules apply to new and second-hand assets where expenditure is incurred on or after 26 November 1996, subject to the transitional provisions in S38H CAA 1990. When considering the useful economic life of the asset it is the period that begins with the first occasion on which the asset is brought into use by any person for any purpose. It is not just the anticipated use by the claimant that must be considered.

The approach that we will adopt, subject to the particular circumstances of the case, is as follows.

1. Regional Jets -- The BATA agreement covered jet airliners with a seating capacity of 60 seats or more. There is a new class of jet aircraft entering service with airlines that will have fewer than 60 seats. These are commonly known as Regional Jets. Some later variants of these new types of aircraft will be within the BATA agreement, as their seating configuration will exceed 60 seats. This new class of aircraft may operate with a different pattern of use and there is little historic data to rely on. These aircraft have many of the characteristics of aircraft within the BATA agreement. That agreement will be extended to allow airlines and lessors to bring Regional Jets within it on the same terms and for the same period. This will mean that they will be treated as 50% long-life and 50% normal-life assets. Subject to the particular circumstances of the case, we will approach any claim for a Regional Jet not brought into the agreement on the basis that these are long-life assets attracting allowances at the long-life asset rate of 6%.

2. Turbo-prop airliners with a maximum take-off weight over 5700kgs operated by commercial airlines -- These aircraft have tended to survive only in a limited range of uses and are in part being replaced by the Regional Jets referred to above. Although in the past, some of these airliners have lasted more than 25 years, the change in the market and the move towards Regional Jets does suggest that those acquired since the start of the long-life asset rules are unlikely to have a life expectancy of more than 25 years in commercial use. We will accept that they qualify in full for the 25% rate of plant and machinery allowances.

3. Executive jet aircraft -- In normal single corporate ownership these aircraft will, in general, last well over 25 years, although this is very dependent on the particular pattern of use. There is a new development, particularly noticeable in the United States but beginning to be seen in the United Kingdom, of fractional or shared ownership of corporate jets, as well as a growing number of companies operating corporate jet services as a business for a variety of users. Based on our research we will accept that where annual usage is above 600 flying hours the aircraft can be treated in the same way as those within the BATA agreement, namely 50:50 assets. These assets are capable of refurbishment and often are upgraded to prolong their lives over the 25-year period. Below 600 flying hours, the life cycle of the aircraft is likely to exceed 25 years without such major refurbishment and we will approach claims on the basis that these are long-life assets attracting allowances only at the long-life asset rate of 6%.

4. Fixed wing turboprops/piston driven aircraft in excess of 2730 kilograms maximum take-off weight -- In general these smaller aircraft are not subject to major refurbishment of components that might be regarded as separate assets under FRS15. The class embraces many types of aircraft in a wide variety of uses. We will accept that where they are flown for more than 600 hours per annum they will not be long-life assets. This will generally mean that aircraft used commercially, for example by flying schools, will attract the 25% rate of writing-down allowance. For aircraft that are used at an annual rate of below 600 hours p.a., the evidence is that they will last more than 25 years and we will approach claims on that basis.

5. Helicopters -- Based on information provided by the British Helicopter Advisory Board on patterns of use, we will accept that helicopters in use for in excess of 1,000 hours per annum will not last for 25 years and will attract the 25% rate of writing-down allowance. For those in less intensive use below that figure we will approach any claims on the basis that the assets will only attract the 6% long-life asset rate.

6. Fixed wing aircraft below 2730 kilograms maximum take-off weight -- These small aircraft are sometimes used in business but more often in private use. Patterns of operation vary enormously but there is little evidence to suggest that the life expectancy is easily predictable at the outset of the aircraft’s life. We are therefore prepared to accept that they are not long-life assets and are thus entitled to the 25% rate of writing-down allowance.

These guidelines will run for the same period as the agreement with BATA, that is, until 31 December 2003 and will then be reviewed.

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

Non-Resident Landlords: Practical Implications Of New Transfer Pricing Legislation At Schedule 28AA Of ICTA 1988

The 1998 Finance Act introduced a comprehensive modernisation of the UK’s transfer pricing legislation. This has been incorporated into the Taxes Acts at Schedule 28AA of the Income and Corporation Taxes Act (ICTA) 1988 (Sch 28 AA). For non-resident landlord companies and partnerships liable to income tax the first year of assessment affected is 1999-2000.

Non-resident landlords will be required to self assess their profits in accordance with the arm’s length principle. This means that if provision has been made:

  • between any two persons which are in the required control relationship;
  • by means of a transaction or a series of transactions;
  • which differs from that which would have been found between independent enterprises;
  • which confers a potential UK tax advantage on one or both of those persons;

then the profits/losses of the potentially advantaged person(s) must be recomputed as if the arm’s length provision had been made. The arm’s length provision is that which would have been found between independent enterprises acting entirely at arm’s length.

Although the legislation covers all provisions, the most common ones likely to be affected for landlords are rents received from and interest paid directly to associates, or to a bank where a guarantee or similar has been given by an associate. It looks at every aspect of the provision, not just its price.

The October and December 1998 Tax Bulletins, Issues 37 and 38, contained articles covering record-keeping, financial transactions and penalties under the new legislation. However, we continue to receive a considerable number of queries specifically in connection with interest paid and rents received by non-residents letting property in the UK. This article deals with the most common questions we have received from such landlords, although many of the answers will be relevant to any company taking out a loan to purchase property.

Who Does The Legislation Apply To?

Sch28AA applies where one of the affected persons directly or indirectly controls the other or the same person controls both. The person who is controlled must be a body corporate or a partnership, but the person controlling may be any person. A joint venture company or partnership that has at least two 40% participants is within the legislation in respect of provisions between it and each of these.

Provisions are exempt where they are made between persons who are each, either liable to corporation tax (whether resident or not) on the relevant activities or, resident and liable to income tax on them.

In the following questions "an associate" refers to another person which has the required control relationship with the non-resident landlord company or partnership.

How does Schedule 28AA differ from previous transfer-pricing legislation?

There are several differences but the most crucial for non-resident landlords is that all aspects of a provision made between associates must be as would be found between independent enterprises acting entirely at arm’s length, not just the price. This is particularly relevant to loan interest claimed against rents as this is determined by the amount lent as well as the interest rate.

Interest arising on a bank loan obtained by means of a guarantee from an associate is within the legislation. Why-isn’t the loan between third parties?

The loan granted by the bank is one transaction but there is also another transaction involved, i.e. the associate giving a guarantee to the bank. So there is a provision (of funding) which has been made between associates by means of a series of transactions and this is therefore within the scope of Sch28AA. If the interest arising is more than would have been obtained without the guarantee, e.g. because the principal loaned is more, then the amount claimed should be recalculated as if no guarantee had been given.

The same applies if the loan has been advanced because of a backing deposit, etc from an associate (a "back-to-back" loan), a letter of comfort or similar.

How do I know what amount would have been lent at arm’s length?

This will vary with the facts and circumstances of each case. If no other persons are involved, a third party lender will determine the amount it would lend by looking at the assets and income of the prospective borrower. In our experience third party lenders are primarily concerned with the value of the property they are being asked to lend against and currently offers of advances appear typically to be in the range of 65-80% if there is a satisfactory projected income stream. In reviewing projected rental streams a third party lender would have regard to both the quality of the tenant and the duration of the leases, and as always lending decisions are the result of the evaluation of a number of general economic and specific commercial factors.

Companies paying corporation tax have had to consider broadly parallel legislation at S209(2)(da), ICTA 1988 for some time. Non-resident landlords may find it useful to consult the articles on "Intra-group payments: deemed distributions: interest and similar sums" in Tax Bulletins Issues 17 and 35 as the practical considerations are largely the same.

Surely if a bank had lent 100%, this would be at a greater interest rate to reflect this increased risk?

It is true that a higher risk may well justify a higher interest rate. However the arms’ length price is a bargain, arrived at between two parties acting independently. Even if a 100% loan were on offer from a bank, which in our experience is not nowadays normally the case, a prospective borrower would not necessarily take this up if they considered the price would not give an adequate return.

Suppose the loan provided by an associate was 100% of the original purchase price, but the value of the property has risen since so that the loan now represents only, say 65% for 1999-2000?

The provision giving rise to the interest, i.e. the loan, was made when the property was purchased, and this is the date that must be considered when considering whether the interest payable would have arisen at arm’s length in any particular year.

In the same way, if the value of a let property has decreased in the interim but the original loan would have been obtained at arm’s length and would still be in place interest arising will not be challenged under Sch28AA.

What if the original loan is refinanced by a provision made between associates?

If such refinancing reflects what would have happened between parties at arm’s length, for example because a better deal is available on interest rates, and the replacement financing is on terms that would have been agreed by such parties, no limitation under Sch28AA will be necessary. If the refinancing is also an occasion on which there is an increase in the amount borrowed -- perhaps because the value of the property has increased the borrowing capacity of the company -- then the purpose of the additional borrowing will need to be examined on its own merits under the normal rules of Schedule A and Sch28AA.

If such refinancing is on terms worse than the original loan, for example because it is based on interest rates which have risen since the original loan was made, the company or partnership will need to establish to the Revenue’s satisfaction that the refinancing would nevertheless have taken place at arms’ length. Where this is not so, or not fully so, the arm’s length provision must be substituted. Normally, in the absence of other considerations, the arm’s length provision would be based on a refinancing at the previous interest rate or on a discount by the lender of the principal lent to reflect the new, higher interest rate. In both cases the net interest payable would remain the same.

It should be noted that this description of the Revenue’s approach to such refinancing applies generally and are reflected in Tax Bulletin Issue 17 of June 1995.

If a mortgage loan were taken from a bank, they would take a charge over the property. Does this mean a loan directly or indirectly provided by an associate is also deemed to involve a charge over the property?

When considering the amount which would have been advanced and the rate of interest which would have been charged, yes, as this is what would have happened at arms’ length. However this does not mean a charge over the property is deemed for any other reason, such as considering whether the interest has a UK source.

Who has responsibility for determining the arm’s length amount of rents and interest paid when a managing agent prepares the return?

Returns should only be signed by a proper officer of the company or any other person authorised by the company. It is therefore the company’s responsibility to determine this information.

Will a charge be imputed on a non-resident landlord providing rent-free residential accommodation within the UK to a UK individual who is a participant?

It will not be Inland Revenue practice to impute a charge under Sch28AA in these circumstances.

Where can I get further help or advice?

Any general enquires relating to the tax affairs of non-resident company landlords may be sent to:

FICO Audit and Compliance
Fitz Roy House
P O Box 46
Nottingham
NG2 1BD

Tel: 0115 974 2041/2049

Specific technical enquiries on Sch28AA should be addressed to:

Susan New or Colin Clavey
International Division (BTG)
Victory House
30-34 Kingsway
London
WC2B 6ES

Tel: 0207 438 7596 (Susan New) and 0207 438 6911 (Colin Clavey)

S703 ICTA 1988 And Self Assessment

We have received a number of enquiries from taxpayers and their advisers about how to return the proceeds of transactions in securities which have taken place either without any application being made for advance clearance under S707 ICTA 1988 or where such an application was refused by the Board of Inland Revenue.

The anti-avoidance legislation at Sections 703-9 ICTA 1988, which is operated by the S703 Compliance Unit (S703CU) under powers devolved by the Board of Inland Revenue, is outside the self assessment regime and operates independently of the self-assessment provisions at TMA 1970. No liability under S703 therefore arises unless and until the Board serves a notice under S703(3) specifying the appropriate adjustment.

Taxpayers should therefore complete their returns on the basis which they consider to be correct without having regard to S703-9. They may, however, wish to draw the attention of the district to whom the return is sent to any correspondence with S703CU in connection with the transactions in question.

As S703 is outside SA, any enquiries by S703CU into the possible application of S703 to the transactions in question will be carried out independently of any enquiry into the self assessment tax return for the period in which the transactions took place.

S703CU may therefore begin enquiries into the possible counteraction under S703 of a tax advantage obtained in one of the prescribed circumstances at S704A-E outside the time limits for making an enquiry under Section 9A TMA 1970 and may instigate or continue such enquiries after the issue of a closure notice under Section 28(5) TMA 1970 in respect of the tax return for the year in which the tax advantage arose.

In accordance with S703(12), Section 29(2) and (3) TMA 1970 do not restrict the Revenue’s ability to make any assessment under S703(3) necessary to counteract the tax advantage provided that the assessment in question is made within six years of the chargeable period to which the tax advantage relates.

Anyone wishing to ascertain whether a transaction for which no advance clearance was obtained under S707 is considered by the Board of Inland Revenue to fall within S703-9 ICTA 1988 before completing a 1999-2000 SA return may apply for S707 clearance in the usual way by writing direct to S703CU at the following address giving full details of the transaction(s) in question :

S703 Compliance Unit
Room 522
22 Kingsway
London
WC2B 6NR

(Article deleted since index 2002)

Information Powers And Legal Advice

This is the article on Information Powers and Legal Advice foreshadowed in Tax Bulletin Issue 41 (June 1999, page 676). Its purpose is to explain our view on the question of claims to professional or legal privilege which are sometimes made in response to requests for information. This subject has attracted significant interest following the recent Special Commissioner’s decision in An Applicant and An Inspector of Taxes (SpC 189) and was debated by the Finance Bill Standing Committee in the House of Commons on 28 June 1999.

Situations where deliberate tax evasion is suspected are outside the scope of this article. As usual, tax evasion or tax fraud, both of which are illegal, destroy legal privilege.

The main information powers available under the Taxes Acts (other than those concerned with self assessment) are in Section 20, Taxes Management Act 1970 and its related sections. These provisions provide for four specific circumstances in which production of documentation cannot be compelled by an inspector. The first relates to notices addressed to a particular taxpayer (under Section 20(1)) as well as notices addressed to a ‘third party’ (under subsections (3) or (8A) and Section 20A:

  • Section 20B(2) -- a person is not bound to deliver documents or furnish particulars which relate to the conduct of a pending appeal by him, nor is a person bound to deliver or make available documents relating to the conduct of a pending appeal by the taxpayer.

The others relate only to third party notices:

  • Section 20B(8) -- a barrister, advocate or solicitor is not bound to deliver or make available documents for which professional privilege could be claimed, that is, broadly speaking, documents containing communications between lawyer and client for the purpose of obtaining or giving legal advice or other legal services.
  • Section 20B(9) -- a person appointed as auditor is not bound to deliver or make available documents which are his property and which were created for his duties as auditor; and
  • also Section 20B(9) -- a tax adviser is not bound to deliver or make available documents which are his property and which consist of communications for the purpose of giving or obtaining tax advice.

The same principles apply equally to advice provided by lawyers and that from tax advisers. References to ‘legal advice’ in this article should therefore be read as covering all tax advice whether or not it is given by lawyers.

It has sometimes been suggested that there is a principle of privilege in general law which overrides or operates in addition to the specific exceptions in Section 20 mentioned above. We have always taken the view that Section 20 is a complete, self contained information power, and that the only exemptions from it are those specifically provided. (see paragraph 8117 of the Investigation Handbook). In An Applicant and An Inspector of Taxes the Special Commissioner confirmed our view though his decision is now the subject of a judicial review.

It does not follow from this view of the law that all the professional advice which is specifically exempted from disclosure in the hands of the adviser, whether under Section 20B(8) or (9), is subject to disclosure if it is held by the taxpayer. That is because, in addition to those specific exemptions for legal advice and documents relating to a pending appeal, Section 20 provides further safeguards.

In particular, the inspector seeking consent to issue a notice under Section 20 must satisfy a Commissioner that, in the inspector’s reasonable opinion, the documents "contain or may contain information relevant to any tax liability to which the person is or may be subject".

We recognise that this test of relevance will not often be satisfied where legal advice is concerned. ‘Pure’ legal advice, that is advice concerned with whether specific pieces of legislation apply to a given transaction, is simply opinion on the law and will be exempt from disclosure save in wholly exceptional circumstances. Advice given after a transaction has taken place will almost invariably fall into this category. In particular, once a point has been raised by us about a completed transaction, subsequent legal advice on that point will never be sought by means of a Section 20 notice.

Sometimes, however, legal advice (and the papers prepared to obtain that advice) may not be concerned solely with legal arguments and may include factual information. In these circumstances the advice is likely to contain material which satisfies the "relevant information" test described above. In particular, the factual information may set out the purpose in entering into the transaction where statutory provisions containing a specific reference to purpose or importing a motive test need to be considered. For example, paragraph 13, Schedule 9, FA 96 (a loan relationship anti-avoidance rule) depends on the taxpayer’s purpose in entering into a transaction.

Likewise, the legal advice may contain information about purposes relevant to the "Ramsay" principle. Ramsay may be in point, if on enquiry there appears to be no convincing commercial purpose for a transaction which is one step in a composite whole.

Practical issues

We recognise that there can be practical difficulties in this area but we would hope that the following practices and procedures should resolve most of them.

  • Information notices designed to obtain details of legal advice will specifically mention that intention (and we will have explained prior to the formal notice or in the summary of reasons required under S20(8E) why the advice is considered relevant to the point at issue).
  • Approval must always be obtained from Compliance Division before an Inspector can proceed.
  • Applications for consent for any such notice will be made to a Special Commissioner, save in wholly exceptional circumstances.
  • Copies of documents containing both disclosable material and ‘pure’ legal advice may blank out the latter (as the Economic Secretary to the Treasury indicated in the debate mentioned above) and any dispute may be referred to the Special Commissioner who gave consent to the issue of the notice.

Similar issues can arise in connection with the information powers relating to certain special areas of tax law and in particular in connection with the information powers for self assessment (in Section 19A Taxes Management Act and, for companies, in Paragraph 27, Schedule 18 Finance Act 1998).

Generally in these other contexts our approach will be as described in this article. And specifically as regards the self assessment information powers two comments may be helpful.

First, the test governing the use of those powers is whether the information sought is reasonably required for the purposes of our enquiry into a SA return. We accept here that information which is not relevant to a tax liability (the test in Section 20) will also necessarily fail the self assessment test.

Secondly, no prior consent to the issue of an SA information notice is needed from a Commissioner. There is instead a right of appeal (to the General or Special Commissioners as the appellant wishes) against its requirements. In addition, the practices described in the first, second and fourth bullets above will be followed.

The following examples are intended to assist practitioners in understanding our approach. They should be read in that spirit. They are not definitive and changes to the facts that at first sight seem quite minor could occasionally lead us to take a different view.

Example 1

We inform the UK parent of a multinational group that we wish to review its transfer pricing policies in detail. The company’s board responds by commissioning a report from a specialist legal firm to assess its transfer pricing methodologies and any possible weaknesses. We accept that the report is not likely to be relevant for the purposes of Section 20(1) TMA 1970. On the other hand, Section 20(1) could be used to require production of the raw data and background documentation from which the report was prepared as well as requiring a person to furnish the Inspector with such particulars as may meet the requirements of Section 20(1)(b).

Example 2

An entrepreneur wishes to sell a business that he has carried on through an owner-managed company. He seeks legal advice as to whether it would be advantageous to sell the shares in the company or the business assets themselves and, subsequently, follows that advice. Although the advice may be tax driven there is no reason for us to suspect a preordained composite transaction with steps inserted for tax avoidance purposes which might bring the Ramsay principle into play and no purposive test requiring us to look into the mind of the person taking the decision appears relevant. We therefore accept that the advice is not relevant to the person’s tax affairs and that Section 20(1) TMA 1970 could not be used.

Example 3

A UK group wishes to expand its operations by purchasing the business of an overseas company in a joint venture with another non resident group. Legal advice is taken and a number of possible structures are considered involving the creation of structures which are fiscally transparent in one country and opaque in another and alternative methods of funding. Eventually, one such structure is picked and the transaction goes ahead. We however suspect that the UK group is seeking a double deduction for finance costs, in the UK as well as a further deduction overseas. Here, several steps are inserted before the purchase of the business and the Ramsay principle may apply if the steps have no commercial purpose other than the avoidance of tax. In addition, paragraph 13 Schedule 9 FA 1996 may apply to the loan relationships if there are unallowable purposes. The legal advice relating to the transaction which was given to the UK group may provide evidence of purpose and may therefore be relevant. We would be prepared to use Section 20(1) TMA 1970 in these circumstances.

Example 4

A company wishes to pay its directors substantial bonuses but does not wish to account for tax under PAYE or pay employer’s NIC. It seeks legal advice and is recommended a scheme involving a number of offshore trusts. The scheme is implemented and the directors receive their bonuses without deduction, although they offer to pay the tax under Schedule E. Again, several steps have apparently been inserted into a composite transaction in the means whereby the bonuses leave the company and reach the directors so the Ramsay principle may apply. The legal advice may provide evidence of the purpose of these inserted steps and we would be prepared to use Section 20(1) TMA 1970 to require its production.

Example 5

A UK group decides to restructure itself after making heavy losses and instructs tax advisers to ensure that the restructuring is tax efficient. They suggest a series of transactions which achieve the necessary restructuring and also enables ACT to be paid on an intra-group dividend in a way which gives rise to both a repayment of mainstream CT and a dividend against which losses can be set to give rise to a claim to payment of a tax credit. The Group claims that the transaction was a commercial restructuring carried out in a tax efficient manner. We need to consider whether there is a preordained composite transaction and, if so, whether there are any steps inserted solely for tax purposes. In these circumstances it is necessary to look at the transactions as a whole and the intentions of the directors as evidenced in the advice from their advisers. We would therefore be prepared to use Section 20(1) TMA 1970 to require production of the tax advice to the extent it was evidence of those intentions as well as other contemporary documentation.

Example 6

A company occupies a building that is badly damaged in a storm. Architects are instructed and produce three alternative proposals, all of which involve extensive alterations. The directors are concerned that expenditure on one or more of the proposals might be considered to be capital expenditure and not allowable as a deduction in computing profits for tax purposes. The directors seek advice from a specialist tax adviser. This advice would not be relevant to the company’s tax affairs because it would be no more than an opinion. We accept that Section 20(1) TMA 1970 would not be used in these circumstances.

Example 7

A person buys a plot of land and sells it three months later at a large profit. He claims that the land was bought as a medium term investment and there was no particular intention to sell it quickly at the time of purchase. Immediately prior to the purchase legal advice was taken about the tax implications of the transaction. The request for legal advice and the advice itself may contain information about the intention of the person at the time the land was purchased. As such it may be relevant in deciding whether the transaction is to be taxed as a capital gain or as an adventure in the nature of trade. We would be prepared to use Section 20(1) TMA 1970 in these circumstances.

Interpretations

(Superceded by CT 3449)
Sections 765 And 765A ICTA 1988

Section 765 requires UK companies with overseas subsidiaries to obtain the consent of the Treasury before certain transactions involving those subsidiaries are carried out. In line with European Union law, Section 765A disapplies Section 765 where the transactions are capital movements within the European Economic Area, substituting a reporting requirement instead. This article clarifies the position concerning three issues on which we have received questions from taxpayers and practitioners.

The first issue concerns a proviso that used to mean that the disapplication of Section 765 by Section 765A was relevant only where the transaction was carried out "with a view to establishing or maintaining lasting economic links". Its effect was that, if no such links existed, Section 765 applied in the normal way. This was explained in paragraphs 8 and 9 of Inland Revenue Statement of Practice 2/92.

Changes made by the Maastricht Treaty removed the requirement for such links to exist. Paragraphs 8 and 9 of SP2/92 do not apply therefore to transactions carried out on or after 1 January 1994.

The second issue concerns the Treasury General Consents. To ease the administration of Section 765, the Treasury is empowered to give a general consent to transactions that might otherwise need its special consent. Known as the Treasury General Consents, these were last issued in 1988. One of them (at paragraph 3 (c) (ii)) is subject to conditions at paragraph 7. One of the conditions (at sub-paragraph (2) (c)), states that there should not be a loan associated with the transaction that has been made to a UK company by a non-UK company.

As a matter of practice, the loan condition is now regarded as being satisfied where a non-UK lender makes a loan from its UK branch, or where it is resident in a country within the European Economic Area.

The third issue also concerns the Treasury General Consents. Two of them (paragraph 3 (b) (i) and paragraph 8 (c)) apply to transactions between members of groups of companies wholly within another country. Definitions of these two types of group -- an "overseas group" and "territorial group" respectively -- are given at paragraph 2. Very broadly, they rely on the definition of a UK group for group relief purposes at Section 413 ICTA 1988.

South African groups did not previously satisfy either definition, because of the way they were taxed in South Africa. It has been put to us that changes to South African law in 1997 mean that such groups can now form an "overseas group" or a "territorial group" for the purposes of the General Consents. The matter is not free from doubt. But, as a matter of practice, the basis of taxation in South Africa is no longer regarded as preventing South African groups which otherwise fulfil the conditions set out in the respective definitions, from being able to form either an "overseas group" or a "territorial group".

(Superseded by BIM47717)

Restriction On Allowable Rental For Hire Of Car Costing More Than £12,000: Section 35(2) Capital Allowances Act 1990: Change Of Interpretation Of "Retail Price When New"

Where a trader hires a motor car the retail price of which when new exceeds £12,000, the deduction allowable for tax in respect of the rental for the hire of the car is reduced in the proportion which £12,000 plus half the excess bears to the retail price.

We have previously taken the view that the manufacturer’s list of suggested retail prices, net of any discount available generally, should be used to establish the retail price when new.

Following discussions with the British Vehicle and Rental Leasing Association, we have revised our view. There have been considerable changes in the car market in recent years. In particular as discounts to private and fleet buyers are common and well known, the price paid is frequently lower than list price.

We now take the view that where the lessee knows the actual price paid by the lessor for the car when new, this can be used as the retail price when new. Where the lessee is not aware of the actual price paid by the lessor, the manufacturer’s list price net of any discount available generally should be used as before. In either case, the price should be inclusive of extras and VAT.

This interpretation only applies to this rule. It does not affect other tax provisions on cars, including the benefit charges for employees, which use different definitions for the price of the car.

Miscellaneous

(Article deleted since index 2002)

Incentive Award Unit (Formerly The Incentive Valuation Unit)

The Inland Revenue have given a new title -- Incentive Award Unit (IAU) -- to the unit which administers the Taxed Award Scheme arrangements (TAS). This new name reflects the changes set out in this article. The Revenue are proposing that the IAU should take on extra functions from 6 April 2000 because of forthcoming changes to the system of National Insurance Contributions. The Unit has also relocated, and the new address and telephone numbers are given below.

The IAU currently administers the TAS arrangements which enable both employers and third parties to pay voluntarily, in one lump sum, tax on non-cash incentive prizes awarded to employees. This means that employees can receive them "free of tax".

(From 6 April 1996 employers have additionally been able to pay the tax and, since 6 April 1999, the Class 1B National Insurance Contributions due on non-cash incentive prizes given to their own employees. They do this by entering into a Pay As You Earn Settlement Agreement (PSA) with the Inland Revenue. Most employers providing non-cash incentive awards in these circumstances will normally find a PSA is preferable to a Taxed Award Scheme.)

Change Of Address

The Incentive Award Unit (IAU) is now at:
Inland Revenue
Manchester Blackfriars TDO
Trinity Bridge House
2 Dearmans Place
Salford
M3 5BH

Phone: 0161 261 3269

Fax: 0161 261 3357

E mail: manchesterblackfriars.ir.tbh@gtnet.gov.uk

Proposed Changes In Incentive Award Unit Functions For Tax Years 2000-1 Onwards

Background

National Insurance Contributions (NICs) for tax year 1999-2000

For tax year 1999-2000 (6 April 1999-5 April 2000) employers have to account through PAYE for Class 1 NICs on non-cash vouchers provided to their own employees, whether provided by themselves or a third party, and whether or not a TAS arrangement is entered into.

And employers also have to account through PAYE for Class 1 NICs on the tax paid under a TAS, whether the tax is paid by themselves or a third party.

Proposed NICS Changes For Tax Year 2000-1

The position for employers in relation to NICs on tax paid through a TAS is unchanged for 2000-1.

But, under proposals in the Child Support, Pensions and Social Security (CSPSS) Bill currently going through Parliament, the NICs charge an employer has to meet on non-cash vouchers provided to employees by a third party will be under Class 1A and not Class 1, whether or not a TAS is used. (Where the employer provides the vouchers, the charge remains under Class 1.)

And under those proposals employers will additionally be responsible for Class 1A NICs on most benefits in kind provided to their own employees, whether provided by them or by third parties.

However there are proposals in the CSPSS Bill that, for 2000-1, third parties can voluntarily offer to pay the Class 1A NICs on non-cash vouchers, and on benefits they provide to employees where the direct employer has not arranged or facilitated the provision. And, where third parties make such awards, they can also offer to account for Class 1A NICs if they pay the employees’ tax on the awards. Where this is the case, the employer will have no NICs responsibilities in relation to the vouchers and benefits in question or the tax on them.

Proposed NICs Changes For Tax Year 2001-2

Under proposals in the CSPSS Bill, from 2001-2 third parties who provide employees with non-cash vouchers and benefits not arranged or facilitated by the direct employer will automatically have a Class 1A NICs liability on that provision. And if third parties pay the employees’ tax on the vouchers and awards, the third parties will also have an automatic Class 1A liability on the tax payments. Where Class1A liabilities fall to the third parties, the direct employer will have no NICs responsibility in relation to the matter which is the subject of a third party Class 1A charge.

Role Of Incentive Award Unit

It is likely that the IAU will be the Revenue Office which will deal with any Class 1A NICs due from 2000-1 onwards in relation to benefits in kind provided under Taxed Award Scheme arrangements by employers to their own employees.

And it is also likely that the IAU will also deal with Class 1A NICs due from third parties under the voluntary arrangements for 2000-1 and under the automatic obligations for 2001-2 onwards.

The first payments of Class 1A NICs under the CSPSS Bill will not be due before 19 July 2001.

Further information on the proposed National Insurance Contributions changes and collection procedures will be provided as the CSPSS Bill proceeds through Parliament.

Contact Points

Information packs about Taxed Award Schemes and the NICs implications of making non-cash incentive awards are available from the IAU at the address given above. The IAU will automatically be sending copies of the revised information to all those who currently have live Taxed Award Schemes.

Information about PAYE Settlement Agreements can be obtained from any Tax Office.

Applications For International Clearances, Approvals And Agreements

The Business Tax Group of International Division has responsibility for administering several statutory and non-statutory clearances, approvals, and agreements. These are described below with references to sources of guidance about the particular procedures to be followed:

  • notification of company migration and approval of arrangements for payment of tax liabilities, Section 130 FA 1988 (see Statement of Practice 2/90)
  • application for Treasury consent under Section 765 ICTA 1988 to certain transactions in shares or debentures (see IR Corporation Tax Manual CT 3449)
  • notification as required by Section 765A ICTA 1988 of transactions falling within the European Capital Movements Directive (see Statement of Practice 2/92)
  • application for an Advance Pricing Agreement relating to transfer pricing issues in accordance with Section 85-87 FA 1999 (see Statement of Practice 3/99)
  • clearances in relation to Controlled Foreign Companies provisions under Section 747-756 and Schedules 24-26 ICTA 1988 (see Corporation Tax Self Assessment: Controlled Foreign Companies, 2.6, June 1999)
  • pre-transaction advice on funding issues (Tax Bulletins Issues 17 and 37)

The Inland Revenue has a duty to maintain the confidentiality of all information sent to us, and we recognise that particular sensitivities can arise in relation to the applications we receive. To help us handle the information securely, the Business Tax Group requests applicants to follow two guidelines:

  • applications should be addressed to the Business Tax Group and, in most cases, named officials according to the type of clearance sought;
  • applications and subsequent correspondence should be sent either by courier or marked "private and confidential"

The name and address of the individual official according to the type of clearance sought is provided below, except in the case of advice on funding issues where a general address is provided. After the initial application has been made, a different official may take responsibility for responding, and subsequent correspondence should be addressed to that individual.

  • company migrations (S130 FA 1988):
Mr Douglas Rankin
Business Tax Group
(Company Migrations)
Inland Revenue
International Division
Victory House
30-34 Kingsway
London
WC2B 6ES
  • transactions in shares or debentures (S765 and S765A ICTA 1988):
Mr Douglas Rankin
Business Tax Group
(Treasury Consent)
Inland Revenue
International Division
Victory House
30-34 Kingsway
London
WC2B 6ES
  • Advance Pricing Agreements (S85-87 FA 1999):
Mr Andrew Hickman
Business Tax Group (APA)
Inland Revenue
International Division
Victory House
30-34 Kingsway
London
WC2B 6ES

(For APAs involving oil taxation the contact continues to be, as stated in SP3/99):

Mrs Janice Cross
Deputy Director (APAs)
Inland Revenue
Oil Taxation Office
Melbourne House
Aldwych
London
WC2B 4LL
  • CFC clearances:
Mr Stephen Hewitt
Business Tax Group
(CFC Clearance)
Inland Revenue
International Division
Victory House
30-34 Kingsway
London
WC2B 6ES
  • pre-transaction advice on funding issues:
Business Tax Group
(Advice on Funding)
Inland Revenue
International Division
Victory House
30-34 Kingsway
London
WC2B 6ES

This information will be updated regularly on the web-page, Clearances and Approvals, to be found under Technical Information on the Inland Revenue web-site: (www.inlandrevenue.gov.uk) and will also appear in web-pages for the Business Tax Group, International Division which are currently being developed on the Inland Revenue web-site. If applicants wish to check that the information is still current, please phone Business Tax Group Registry on 020 7438 6945.

Penalties For Inaccurate National Insurance Contributions Details On End Of Year Returns (eg. Missing National Insurance Numbers)

We have received a number of queries from employers who assume that this penalty, which was deferred last year, will be introduced from April 2000. We want to confirm that the penalty is still deferred.

Background

Section 56 of the Social Security Act 1998 included the power to make regulations imposing penalties where a person fraudulently or negligently made an inaccurate National Insurance Contributions (NICs) return, even though the total NICs paid for the year was correct. When this provision was introduced it was in response to concerns that the level of inaccurate returns was unacceptably high. Errors such as the omission of NI numbers were frequent and hampered the Government’s efforts to tackle fraudulent use of the NI number -- in particular working and claiming benefit at the same time.

Changes From April 1999

However, during the passage of the Social Security Bill a number of other changes were introduced which caused a re-think about the timing of introducing such a penalty. In particular the restructuring of NICs (introduction of a secondary threshold) meant that the end of year returns for the first year in which the penalties would have become operational, 1999-2000, would contain novel features. It was decided to defer making the regulations that were necessary to activate the primary legislation. A news release explaining the 1999-2000 penalties regime -- including the deferral of the inaccuracies penalty -- was issued on 31 March 1999.

Current Position

No time limit was set on the deferral. Responsibility for National Insurance contributions transferred to the Inland Revenue on 1 April 1999 and Department of Social Security (DSS) Ministers decided it would be inappropriate to tie the Revenue’s hands by announcing a future implementation date. We have therefore kept the matter under review but feel, at this stage, that introduction of this penalty would not be consistent with our emphasis on offering support and help to businesses to get their tax and NICs affairs in order. We are working with DSS to tackle some of the causes of the inaccuracies relating to NI numbers, and the efforts of our business support teams should also go some way to reducing the frequency of error.

If at a future date the penalty is introduced, the commitment, made during the passage of the Social Security Bill, that no penalty would be imposed on an employer without an educational visit to try and root out the problems, will be relevant.

Contact point:

Vicky Passant
Compliance Division
Room 412
22 Kingsway
London
WC2B 6NR

Inland Revenue Statements of Practice and Extra-Statutory Concessions Issued Between 1 February 2000 and 31 March 2000

Extra Statutory Concessions

Number Title Date of Issue
A99 Tax treatment of compensation for mis-sold Free Standing Additional Voluntary Contribution Schemes (FSAVCS) 28-02-2000

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, Sarah Guerra, 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 2000 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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