Inland Revenue Tax Bulletin - Issue 52

Contents

Interpretations

Miscellaneous

 

Corporation Tax - Large Companies: Quarterly Instalment Payments and Group Payment Arrangements

We are approaching the end of the first annual cycle under the new corporation tax self assessment (CTSA) rules. Two significant changes for large companies have been the requirement to pay corporation tax by quarterly instalments (QIPs) and the option to pay on a group-wide basis through a group payment arrangement (GPA).

This article addresses some practical issues in relation to QIPs and GPAs. It does not attempt to outline the rules and practicalities of QIPs and GPAs. For this background, see

Both of these guides are available on the Internet at www.inlandrevenue.gov.uk.

The scope of this article is limited to practical advice on specific technical and operational matters.

Answers to some Practical Questions

1. What difference should QIPs and GPAs make to the entries on a company’s CT600 tax return form?

A company is required to show in its return if it considers that it was liable to pay by quarterly instalments on the basis of its self assessment. It must do this by putting an “X” in box 79 at the foot of page 5 (short calculation) or page 8 (detailed calculation).

We have seen a number of cases where a company has paid instalments but failed to put an “X” in Box 79. It is essential to make this entry whether or not the company actually made the necessary payments. We apply the normal “Process Now, Check Later” principle of self assessment to all aspects of the return, and the liability to pay by QIPs is no exception. Our computer system will initially calculate, charge and credit interest on the basis of the entry (or lack of an entry) in Box 79.

In particular, it makes no difference to the entry required in Box 79 that the company’s instalment payments have been paid through a group payment arrangement. A large company participating in a GPA must still put a cross in Box 79.

A company whose corporation tax has been paid through a GPA

  • must indicate this by putting an “X” in Box 80. It should also
  • enter “£0.00p” at Box 75 (“Tax already paid (and not repaid)”) except in the rare circumstance that the return is being filed after money has been allocated down to it from the GPA. And it should also
  • leave Box 76 blank (“Tax Outstanding”). This is perfectly acceptable provided an “X” is present in Box 80.

In all other respects, it should complete the CT600 return form in exactly the same way as it would if there were no GPA in force. In particular, at Box 72 it must show its self assessment of the correct amount of tax payable by the company. The fact that this liability is actually paid through a GPA should not affect this entry.

We will not issue payment applications until the GPA is closed and the monies paid under the arrangement have been allocated out to the individual participating companies.

Image: Extract of CT600 tax return form (98k)

2. How can companies help to ensure that the payments they make are correctly allocated by the Inland Revenue?

The introduction of QIPs has highlighted the problems that can occur if the correct payslip or payment reference number is not used.

Our Accounts Offices handle many thousands of payments each day and most are processed automatically, using the reference number on the payslip enclosed with a cheque payment or quoted in the transmission with an electronic payment. All payslips that we issue are encoded to tell our computer

  • the taxpayer reference, and
  • the appropriate accounting period.

Each payslip is intended for a specific taxpayer and a specific accounting period. The payment reference shown on your payslip will be in the following format:

Image: Extract from example payslip (20k)

It is important that you use the correct payslip or quote the correct reference for each payment you make.

We have seen a number of cases where a company has used the wrong payslip or quoted the wrong reference, leading to payments being allocated automatically to the wrong period. This is not easy for us to spot and we cannot guarantee to correct such errors before the return is filed. So if you make a mistake, it can lead to incorrect interest calculations and even incorrect repayments.

It is particularly important that you take care to use the correct payslip during the QIP transitional period, when you may need to make payments for more than one accounting period at much the same time. And if you intend to pay electronically by either CHAPS or BACS, please ensure that the reference you give to your bank is both correct and complete.

3. How does the Inland Revenue deal with interest in relation to a company’s QIP liability?

We pay “credit interest” on all overpaid balances between the due date of the first QIP and the normal due date (nine months and one day after the end of the accounting period). We charge “debit interest” on all underpaid balances during this same period. Credit and debit interest are calculated on a daily basis on the positive or negative balance for each day of the period. There are some worked examples at paragraph 12.10.7 of CTSA/BK2.

We calculate credit and debit interest retrospectively, once the normal due date has passed and the tax charge is established - normally from the self assessment in the company’s tax return.

  • For a company which is not part of a group payment arrangement, this means that we normally credit or charge the interest to its account as soon as we process the return form (or when the normal due date passes, if the return is filed before then).
  • For a company which is a participator in a GPA, we credit or charge the interest to its account when we allocate out to individual participating companies the payments made into the arrangement. We do this when the group returns its allocation instructions in response to the “Closure Notice” (Form CT630) or, if the group does not specify an allocation, 30 days after we send out our proposed allocation on Form CT631.

We immediately post the credit or debit to the company’s account with us for the accounting period and it is set against, or added to, any unpaid tax for the period.

If the corporation tax paid (either directly by the company, or allocated to it from a GPA) as at the normal due date is less than the company’s corporation tax liability, we charge late payment interest on the unpaid amount until the date it is paid. This is charged at a higher rate than the debit interest applicable to underpaid balances before the normal due date.

If we repay corporation tax to a company after the normal due date, we add repayment interest to the repayment. This repayment interest is calculated from the normal due date (or the date the repaid tax was paid, if that is later) to the date of repayment. It is paid at a lower rate than the credit interest rate applicable to overpaid balances before the normal due date.

4. How can one tell what interest has been credited or charged to a company’s account?

By the time you read this article, repayment notifications will include:

  • both credit interest and repayment interest under the heading “Interest payable to you”, and
  • both debit interest and late payment interest under the heading “Interest payable by you”.

Reconciliation statements, applications for payment and the like will show

  • “Interest accrued, including any debit interest” as an element within the total amount chargeable, and
  • credit interest will be reflected together with actual payments made under the heading “less already paid, including any credit interest”.

We apologise for an earlier problem, which meant that debit interest charges were being omitted from certain outputs. This has been fixed. We also acknowledge that our repayment notification outputs were misleading, showing payments of credit interest as repayments of tax, without explanation. Again, this has now been rectified. We hope that the handling of interest on our forms is now clearer.

5. What effect does a group payment arrangement have upon repayments due to a participating company?

Normally, a company participating in a GPA can only become entitled to a repayment once the appropriate proportion of the payments made for the group as a whole have been allocated to it, following Closure. But once that has happened, the money allocated to an individual company from the arrangement is treated for all purposes as having been paid by the company on the dates it was actually paid into the GPA.

If the money allocated to a company, plus any credit interest to which it is entitled, exceeds its total liabilities (corporation tax, interest and any penalty) for the accounting period, the company becomes entitled to a repayment as if it had paid the tax directly. We will normally process this automatically, without claim. So if you want us to deal with such an overpayment in a specific way, it is important that you tell the Inspector who deals with the company, in advance. Equally, the company can give notice that any such balance is to be surrendered under Finance Act 1989 Section 102, subject to the normal conditions of such a surrender.

However, a company may be entitled, without awaiting the closure of the GPA for the period, to immediate payment of certain surpluses revealed by its return where there is no net corporation tax liability. In particular, this may apply to income tax deducted at source from gross income, construction industry deductions or a payable research and development tax credit. You should make the relevant claims in the company’s return in the normal way.

6. What effect does a GPA have on the operation of Section 102 of Finance Act 1989?

A group payment arrangement is clearly not itself a company. So neither Section 102 itself, nor its extension under Regulation 9 of the Corporation Tax (Instalment Payments) Regulations 1998 (“the QIP regulations”) can apply to any transfer of money between a GPA and an individual company, whether or not that company is a participator in the arrangement. But there will generally be an alternative way of dealing with any overpayment which will be equally efficient in mitigating the group’s overall interest exposure.

Example 1

A Ltd files its return for its accounting period 1.1.2000 - 31.12.2000. The bulk of the company’s income is investment income from which income tax has been deducted. After set-off against A Ltd’s corporation tax liability, there is an income tax repayment due to it of £50,000. The company wishes to surrender this amount under S.102 to other members of its group, all of whom are participators in a GPA.

It is not possible to “pay” this surrender “into the GPA”. (It makes no difference whether A Ltd is itself a participator in the GPA or not.) However, it is perfectly possible, subject to the rules of S.102, for A Ltd to surrender the repayment to the individual companies in the usual way. A Ltd should give notice in its return and make the relevant entries in Section 7 of the return form in the usual way. The group will then need to take the surrendered amounts into account when allocating money from the group payment arrangement to the participating companies at closure.

Example 2

B Ltd is a member of a GPA for its first CTSA accounting period, 1.4.1999 - 31.3.2000.

B Ltd’s liability for its last Pay and File accounting period, 1.4.1998 - 31.3.1999, has just been settled and the company is entitled to a repayment of £20,000 for that period. There are no outstanding liabilities of other group members for this year against which it can surrender this repayment under S.102.

As in Example 1, the company cannot “pay” this money into the GPA. However, it may be advantageous from an interest point of view to set this repayment against its liability for the next period and for the group to reduce the payments it makes into the GPA on B Ltd’s behalf accordingly. This is perfectly acceptable, and the company should tell the Inspector if it wants this to happen. Again, the group will need to take this into account when allocating the payments made into the GPA between the participators at closure.

Example 3

C Ltd is the nominated company in relation to the “Sea Activities” GPA for the period 1.4.2000 - 31.3.2001. Management accounts show that payments into the GPA for this period have been excessive and C Ltd is in a position to claim a repayment from the GPA of £1.5 Million.

D Ltd is a 75% subsidiary of C Ltd, but is not in the Sea Activities GPA. It has not paid any quarterly instalments for its accounting period 1.4.2000 - 31.3.2001, but its circumstances changed during the latter part of the year and management accounts show, in retrospect, that it should have done so.

The group has a choice:

  • C Ltd can claim the full repayment under Clause 4 of the GPA contract and ask for the necessary amount to be credited to D Ltd’s account for the period. However, this will not be interest-efficient. At this stage S.102 cannot apply, as no individual company is entitled to a repayment. The credit to D Ltd’s account will only be effective from the date on which it is agreed, not on the original dates of payment into the GPA.

Alternatively

  • C Ltd can leave all or part of the potential repayment in the GPA and distribute it as a surplus to one or more of the participating companies at closure. That company (or companies) can then give joint notice with D Ltd under S.102 and Regulation 9. This is likely to prove more effective in mitigating the interest effects of D Ltd’s failure to pay by QIPs.

Either way, D Ltd should write immediately to the Inspector who deals with its affairs to explain the reasons for the original error in relation to its instalment payment obligations, and to set out the intended course of action. We would not seek a penalty for non-payment under the Regulations in such a case, where it is clear that the group has acted in good faith and taken action to correct its failure to pay by QIPs at the first opportunity.

7. How should a group decide, at closure, the allocation of payments made into a GPA between the individual participating companies?

A group payment arrangement clearly simplifies the making of payments. But the real advantage of a GPA comes at closure. Paying through a GPA allows the group benefit of hindsight in allocating payments made on behalf of many companies between the individual companies. By tailoring the division of each individual payment made between the participating companies, the group can optimise the overall interest position. This is entirely legitimate and is the point of the arrangement.

We have seen instances of groups allocating payments in a way which does not appear to be advantageous. This may be based upon a misconception. For example, one group allocated each payment in proportion to the tax liabilities of the participating companies, even though some are not liable to pay by QIPs, and the allocation results in a higher than necessary overall debit interest liability for the group. There are no restrictions of this kind.

It is only advisable to allocate instalment payments to non-QIP companies if either

  • the payment being allocated is in excess of the overall liability of the participating companies liable to pay by QIPs as at the next instalment date, or
  • there is likely to be an uplift in the tax charge of the company in question for the period beyond its original self assessment, for example where we have its return under enquiry at the point of closure.

On the other hand, we have also seen a number of notices of apportionment in which the group has asked to allocate a negative amount to a particular participating company from one or more payment - for example, allocating a payment of £500,000 between 3 companies: £300,000 to A; £400,000 to B; (minus £200,000) to C.

This is not permissible. The group’s power of apportionment under Clause 8 of the GPA contract relates to “payments made” - that is, actual amounts of money, not notional figures. Clearly a negative payment is not possible.

8. Does it matter if there is a delay in informing the Revenue that a company participating in a GPA has left the group?

Yes. Clause 13.1 says that “The Nominated Company shall immediately remove any of the Participating Companies (other than the Nominated Company) from the Arrangement, by giving notice in writing to that effect to the Board, if such company has ceased to be a member of the … Group...”

A group which fails to do so with reasonable speed is in default of its obligations under the contract. And failure to remove such a company expeditiously can lead to real practical problems.

Example

A group has a GPA for the period 1.4.2000 - 31.3.2001.

In December 2000, one of the participating companies is sold out of the group, so is no longer eligible to be a member of the GPA.

If the group does not remove the company from the arrangement before 31.3.2001, the effect of Clause 14(a) of the contract is that the Nominated company remains liable to pay the liabilities of the sold company for the period. And if the company is only removed from the arrangement when the Revenue exercises its power under Clause 13.2 of the contact, the Nominated company is likely to retain the obligation to pay the company’s tax for the following accounting period as well.

9. Does a GPA have to fall if the nominated company draws up accounts for a period exceeding 12 months?

On the basis of the standard contract, yes. The contract is structured around the concept of a “Period of Account”, which is defined in Clause 1.(1) as “any period not exceeding 12 months for which the Nominated company draws up its accounts”.

On the face of it, this invalidates any contract, and so any GPA, where the Nominated company draws up an account for a period exceeding 12 months. This can be a problem, for example, where a group is taken over and required to bring its reporting date into line with the new parent.

To overcome this difficulty, we have introduced an Annex to the contract which the group can choose to adopt if it wishes, rather than allowing the GPA to lapse. The effect of the Annex is to treat the long period of account as two periods of account for the purposes of the GPA.

Groups affected by this sort of situation should seek advice from the Group Payment Team at the Inland Revenue Accounts Office to which they make payments.

Credit and Debit interest, and the loan relationship rules

All interest paid by the Inland Revenue to companies is now taxable, following changes in Finance Act 1998 Sections 33 and 34. Similarly, interest charged by us from a company is allowable for tax purposes in the same way as other interest paid by a company.

Of itself, this change simplifies the tax computation, as “Inland Revenue interest” no longer needs to be adjusted for. However, we do recognise that some practical difficulties are associated with the change, particularly in relation to debit and credit interest accruing during the period prior to the accounting date.

This interest falls within the scope of the loan relationships legislation, in the same way as any other kind of interest receivable and payable. Under the loan relationship rules the interest should be taxed/relieved in accordance with an accepted accruals method of accounting - a receipts/payments basis is not acceptable.

In practice, this may be hard to do with certainty. We expect Inspectors to take a pragmatic view, recognising the inherent practical problems.

Personal Residence: How The Rules Apply To ‘Mobile Workers’ Living In The UK

Mobile Workers

1. This note explains how the Inland Revenue consider the rules of residence and ordinary residence apply to ‘mobile workers’, individuals who usually live in the UK but make frequent and regular trips abroad in the course of their employment or business.

2. For this purpose:-

  • the expression ‘mobile workers’ includes for example lorry or coach drivers who drive their vehicle to and from the Continent; those working on cross-Channel transport; and sales persons who make frequent short business trips abroad;
  • individuals usually live in the UK if their home continues to be in the UK and their settled domestic life remains here;
  • trips abroad are frequent and regular where work patterns are such that individuals make trips abroad every two or three weeks or more often. It would for example include someone travelling to France most Sundays or Mondays in connection with their employment but returning to the UK by or at the following weekend.

Residence status

3. Such individuals sometimes claim to be not resident and not ordinarily resident in the UK, simply on the basis of the limited number of days they spend in the UK in a tax year. While the precise facts of a particular case are always paramount in deciding residence status, we consider that where there are no special circumstances, such individuals are likely to remain resident and ordinarily resident here for tax purposes.

4. General guidance on how the residence rules normally apply to those leaving the UK is set out in chapter 2 of booklet IR20, ‘Residents and non-residents’. Paragraph 2.1 sets out the general principle that individuals who usually live in the UK and only go abroad for short periods,for example on business trips, remain resident and ordinarily resident here. Paragraph 2.2 explains a long-standing Revenue practice in the case of individuals who go abroad for full time employment. They are treated as not resident and not ordinarily resident from the day after their departure if:-

  • they have left the UK to work full time abroad under a contract of employment, and
  • their absence from the UK and the employment abroad both last for at least a whole tax year, and
  • during their absence any visits they make to the UK total less than 183 days in any tax year; and average less than 91 days a tax year over the period of absence up to a maximum of four years.

All these conditions must be met for this practice to apply. It is not sufficient merely for the day counting tests to be met.

5. The treatment under paragraph 2.2 is aimed at individuals who leave the UK for a complete tax year to live and work on assignments abroad. It might for example apply (assuming all the conditions mentioned above are met) to lorry drivers who go to live in Sweden to transport goods within Scandinavia for their firm. In the case of individuals living in the UK but making regular short trips abroad, it is questionable whether they have genuinely left the UK in a residence sense, or can be said to be working full time abroad; and they could not satisfy the condition that their absence and the employment abroad both last for a whole tax year. They have not in our view made the clear break with the UK that the practice in paragraph 2.2 requires.

6. The statutory provisions concerning the residence status of individuals are Sections 334 and 336 ICTA 1988. We have taken legal advice on how these apply to mobile workers. Our view is as follows:-

  • Section 334 broadly provides that Commonwealth citizens who have been ordinarily resident in the UK remain UK resident if they leave the UK “for the purpose only of occasional residence abroad”. On the basis of case law, we consider that individuals who have no settled residence abroad, have no intention to stay abroad indefinitely, and return to a UK base and a UK abode at the end of each assignment, are unlikely to be able to show that they are absent for other than “occasional residence” abroad.
  • Section 336 broadly provides for individuals to be treated as not resident in the UK if they are here “for some temporary purpose only and not with any view or intent of establishing ... residence there”, and have not actually spent six months here in the relevant tax year(1). Case law has indicated that all the facts and circumstances of a case must be considered, and not merely the number of days spent in the UK. We consider that individuals who have a UK-based employment or business, have strong ties with the UK and spend a sufficient amount of time in the UK in a tax year are unlikely to be able to show that they are in the UK for only the “temporary purpose” specified in the statute.

7. In dealing with claims to not resident status from mobile workers who usually live in the UK and make frequent trips abroad, we will apply the law in the light of the facts and circumstances of the particular case. For the reasons considered in this note, it is likely in our view that such claims will probably be invalid on the facts. Nevertheless, taxpayers who disagree with our view that they are UK resident will have the usual right to appeal to the Commissioners. It should moreover be borne in mind that these guidelines are general. We accept that it might be possible for individual taxpayers to show that not resident status was correct on the facts of their particular case.

(1) This is the wording of Section 336(1) in relation to Schedule D. Section 336(2) in relation to Cases I, II and III of Schedule E refers to an individual who is in the UK "for some temporary purpose only and not with the intention of establishing his residence there".

Mobile workers leaving the UK permanently

8. This note is concerned with the residence status of mobile workers who usually live in the UK and have not genuinely left this country. Different considerations apply to those who have left the UK to live abroad permanently. Paragraphs 2.7-2.9 of booklet IR20 explain the circumstances in which such individuals may be treated as not resident and not ordinarily resident. Their return visits to the UK since leaving must have totalled less than 183 days in any tax year, and have averaged less than 91 days a tax year over the period of absence up to a maximum of four years; and they may be required to provide evidence that they have left the UK permanently, or to live outside the UK for three years or more. This group is otherwise outside the scope of this note, but we would like to mention one point.

9. We have recently encountered cases where mobile workers claim to have gone abroad permanently, but evidence has later emerged that the validity of these claims is in doubt. In such cases we may at the outset have allowed not resident status, accepting the claims in good faith on the facts available at the time; but we have later concluded that the individuals may not have disclosed all the relevant information. The fact that such claims may initially have been accepted will not of course prevent us reopening cases where we have reason to believe there may not have been a full and correct disclosure. Where it is established that claims of this sort are invalid, the individuals will then fall to be treated as resident and ordinarily resident in the UK, as explained earlier in this note, on the basis that they do in fact usually live in the UK.

Capital Gains: Similar Procedures for companies Valuation of Large Land Portfolios at 31 March 1982

On 21 March 2000 we announced that we were piloting a new service which provides companies and groups of companies with the opportunity to agree the value of land and buildings owned on 31 March 1982 in advance of a statutory need for such valuations. An article in Tax Bulletin Issue 50 (page 813), which was issued in December 2000, provided further details of the scheme and announced some changes to the rules relating to part portfolios.

The purpose of this article is to clarify the extent of the information required for the properties in a portfolio (or part portfolio) submitted for inclusion in the scheme. It had been envisaged that detailed information would be required for each and every such property. However, we recognise that such a requirement might be unduly onerous for some companies and should be relaxed.

We are therefore limiting the information we initially ask for about individual properties comprised in a portfolio submitted under the scheme to the absolute essentials, and we will subsequently seek further information only for those properties in the portfolio, which are selected for valuation checking.

The essential information initially required for every property in a portfolio comprises:

a) the full address and postcode of each property, together with a plan if required for better identification;

b) a description of the property and its actual use in 1982;

c) the interest held in the property as at 31 March 1982 and,

d) if not freehold, full details of the interest held at 31 March 1982 including term, date of commencement, passing rent and details of rent reviews;

e) a professional valuation of the property (by which we mean a valuation carried out by a professionally qualified valuer, whether employed by the taxpayer or an independent company) together with a note of the basis upon which the valuations have been made and the date to which they relate.

For those properties selected for valuation checking, more detailed supporting information may then be required including (inter alia) planning matters, development potential, state of repair and other relevant and material facts. The Land Portfolio Valuation Unit of the Valuation Office Agency, in the light of discussions with the company or group of companies or its agents, will decide on these specific requirements.

Any company or group of companies interested in using the new service can obtain further information from:

Inland Revenue
Capital and Savings
Room 133
Sapphire House
550 Streetsbrook Road
Solihull
West Midlands
B91 1QU

A note of the tax office and reference to which the company’s Corporation Tax is submitted should be provided. (For a group of companies, this information should be provided in relation to its principal company.)

Interpretations

Capital Gains Tax (CGT): Holdings Of Shares: Matching Acquisitions And Disposals

Finance Act 1998 brought in a new set of CGT rules for matching disposals of shares (and similar fungible assets) with acquisitions. The basic rules are set out in our Help Sheet IR284: Shares and Capital Gains Tax. Since 1998 various questions have been raised as to how these rules apply in different situations. This article sets out the Revenue’s views on some of the regular queries.

These new rules in Taxation of Chargeable Gains Act (TCGA) 1992 do not apply to every share disposal. Most obviously, they do not apply to disposals by companies charged to Corporation Tax on their capital gains. But they are also overridden by special rules in various cases, for instance, where the shares are subject to relief under the Enterprise Investment Scheme, or if they are shares in a Venture Capital Trust.

We have been asked whether the new rules, and particularly the “Bed and Breakfasting” rule discussed below, apply in one specific circumstance. Do they apply when acquisitions and disposals take place whilst the person concerned is not resident in the UK? The short answer is “Yes, they do apply”. So if, for example, an individual “Bed and Breakfasts” shares before coming (or returning) to the UK, the “B&B” rule applies in the normal way, just as all the other rules do when matching that person’s disposals of shares with his/her disposals.

The rest of this article assumes that the normal CGT matching rules apply in the situations described. In particular it assumes that shares are all of the same class, in the same company, and held by the same individual, trustees of a settlement or personal representatives, in the same capacity.

Same day transactions

The first query relates to the “same day” rules in Section 105 TCGA. Section 105(1)

  • treats all acquisitions on one day as a single acquisition
  • treats all disposals on one day as a single disposal
  • matches, as far as possible, disposals with acquisitions on the same day.

Some concern has been expressed that these rules prevent Section 24(2) TCGA 1992, which allows “negligible value” claims, operating as intended. When someone makes a negligible value claim they are treated as having “sold, and immediately reacquired” the asset that is the subject of the claim. If the asset was a holding of shares and the same day rules applied to the disposal and reacquisition, neither a gain nor a loss would arise. The purpose of a negligible value claim, to crystallise a loss from the deemed disposal, would be frustrated.

The same day rule in Section 105 is not new. In fact it goes back to Finance Act 1971. The Revenue’s long held view, based on legal advice, is that the same day rule, which matches “securities of the same class”, does not apply in any case where a particular shareholding (the asset) is deemed to be disposed of and the same asset reacquired. So if a negligible value claim is made the loss is calculated by reference to the original cost of the shares for which the claim is made.

“Bed and Breakfasting” (“B&B”)

The B&B matching rule (Section 106A(5) TCGA) takes second priority after the same day rule, but before other matching rules. It matches disposals with acquisitions of securities of the same class “within the period of 30 days after the disposal”. If there is more than one acquisition in this period you take the earliest acquisitions first.

It has been suggested that a deemed disposal and reacquisition might be within the B&B rule, because the acquisition falls within the 30 day period after the disposal. If that were so a deemed disposal and reacquisition would still be matched to result in no gain/no loss, even though the same day rule did not apply. This result would again frustrate the purpose of any claim for negligible value in respect of shares.

Like the same day rule, the B&B rule applies to match securities of the same class. So we consider that the same result follows. The B&B rule cannot apply where the same asset is deemed to have been disposed of and reacquired. In addition, we do not regard an acquisition as falling “within the period of 30 days after the disposal” if it falls on the same day as the disposal.

Another doubt has arisen where the B&B rule applies. That is, what are the consequences of the B&B rule for shares which were acquired before the relevant disposal? Take the following example:

Example 1

An individual makes the following purchases and sales of shares in XYZ plc:

  • 1 June 1998 buys 5,000
  • 1 July 2001 sells 3,000
  • 15 July 2001 buys 3,000
  • 1 August 2001 sells 5,000

The B&B rule matches the sale of 3,000 shares with the purchase a fortnight later. But how should we regard the 5,000 shares sold a fortnight after that, for example, when working out what taper relief is available?

The sale on 1 August 2001 is matched with the acquisition on 1 June 1998, because the B&B rule applies to the earlier sale. The result for CGT purposes is that the individual is regarded as having held the 5,000 shares continuously from the time he/she acquired them until they are treated as sold under the relevant matching rule. So in example 1 the individual will have held the 5,000 shares for 3 whole years. The gain on disposal of those shares will therefore attract 3 years’ worth of taper relief (assuming that all other taper relief conditions are met).

(Following text to end of article withdrawn following the decision of the High Court in Hicks v Davies)

A similar point arises in relation to shares held by trustees. Section 80 TCGA creates a deemed disposal of trust assets if the trustees leave the UK and become non-resident (and not ordinarily resident). It has been suggested that B&B rule can be used to nullify the gains which would otherwise arise on emigration. Take the following example.

Example 2

As at 31 January 2001 UK resident trustees hold 100,000 shares in a company. These shares have risen greatly in value and a large gain would arise if they were sold, or were deemed to be disposed of under the provision in Section 80. Then on

  • 1 February 2001 the trustees sell the 100,000 shares
  • 3 February 2001 they leave the UK and become non-resident
  • 5 February 2001 they buy another 100,000 shares in the same company (using the proceeds from the earlier disposal).

The B&B rule matches the disposal on 1 February with the acquisition on 5 February and in all probability only a very small gain or loss will arise. Under Section 80 TCGA trustees are deemed to dispose on 3 February of “assets constituting settled property of the settlement immediately before” they emigrated. But at that time the they do not actually hold any shares. The suggestion is that there are therefore no assets which can be deemed to have been disposed of under Section 80(2) TCGA.

However this is not the right way to look at this situation. For CGT purposes the shares sold on 1 February are regarded as the ones bought on 5 February. It must follow that the shares held before 1 February had not been disposed of (again, for CGT purposes) by the time the trustees left the UK. Those shares still constitute settled property immediately before the emigration, and must be treated as disposed of and reacquired at that time under Section 80(2) TCGA.

Capital Gains Tax: Section 31(7B) Matrimonial Causes Act 1973 as enacted by the Family Law Act 1996 Court Orders for payments of lump sums

Section 31 Matrimonial Causes Act 1973 [MCA] gives the court power to vary, discharge or suspend an order for financial provision for a party to a marriage or former marriage. Where under Section 31(7A) MCA the court has discharged an order for periodical payments or varied such an order, Section 31(7B) MCA provides that the court has power to make a supplementary provision including an order for the payment of a lump sum.

We have been asked what the position is for capital gains tax where, in effect, a court replaces in whole or in part its order for periodic payments by an order for a lump sum payment.

In exercising its powers under Section 31 MCA the court is required to have regard to all the circumstances of the case and in particular whether any of the criteria listed in Section 25(2)(a)-(h) MCA have changed since the original order was made. It is making a fresh exercise of its discretionary powers. The order under Section 31(7B) MCA is not derived from the discharge or variation of the order for periodical payments, even though that is the occasion which enables it to exercise this power.

In our view the lump sum derives from the exercise of the court’s discretion in making its order and therefore is not a capital payment derived from an asset. Therefore in this situation Section 22(1) TCGA 1992 is not in point and the recipient of the lump sum payment would have no liability to capital gains tax on the receipt.

Miscellaneous

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

Tax Barrister Convicted

Michael Stannard, aged 51, is a barrister of the Middle Temple having been called to the Bar in 1973. Since 1978 he has been a member of the Bar in Gibraltar. He went to live in Jersey in 1974 working until 1976 with a legal firm based in Jersey. Since 1976 Stannard has worked on his own in the field of tax planning, based initially in Jersey and more recently in Hambye, Normandy, France. He also has a property in Switzerland.

In October 1997 the Inland Revenue’s Special Compliance Office executed a substantial number of search warrants, obtained under Section 20C Taxes Management Act 1970, when they raided premises as part of the largest search operation ever carried out by the Inland Revenue. The investigation extended to the Isle of Man, USA, Hong Kong, Cyprus, Liechtenstein, Republic of Ireland, France and Denmark.

Stannard purchased subsidiary companies which were part of existing UK groups and which had substantial corporation tax liabilities about to crystallise and the money available to settle the liabilities. Following his purchase of the companies, Stannard falsely claimed that the profits on which the corporation tax were potentially due were extinguished by huge advance payments of interest to a UK company set up on behalf of Stannard and administered from Liechtenstein. The fraud relied on Stannard’s creation and use of a substantial chain of offshore companies including what he called his “Mickey Mouse bank” - The Investment Bank of Europe and the United States.

Stannard stood trial with another barrister, Robert Nelson, at Southwark Crown Court. In respect of each of four company purchases Stannard and Nelson faced a charge of cheating the Inland Revenue of public revenue, namely corporation tax, by claiming a deduction against profits for interest paid including debenture interest paid in advance to Anglo Austrian Finance Ltd (the UK company administered from Liechtenstein). Both defendants pleaded not guilty to the charges and their trial began on 10 October 2000. On 25 January 2001 Nelson was acquitted but Stannard was convicted on two counts.

Before passing sentence on 9 February 2001, His Honour Judge Fingret said that each of the two offences on which Stannard had been found guilty were so serious that only custodial sentences could be justified. The judge told Stannard that “indulging in cheating the public revenue on the scale which you were found to have done involved playing for very high stakes. The profit was considerable and the punishment must reflect such gains. These offences involve the creation of a complex web of companies secretly controlled by you clearly in an attempt to shield you from detection. Those who are convicted of such offences inevitably face deterrent sentences.” The judge remarked that there were aggravating features such as the tax loss to the public purse of in excess of £2 million together with an actual profit made by Stannard of between £417,000 and £500,000; the abuse of public trust by a professional man expert in tax schemes and the sophisticated nature of the scheme.

HH Judge Fingret said that the range of sentences for large scale efforts to cheat the Revenue is between four and eight years and taking into account the aggravating features the starting point in this case was six years. The judge then took into account mitigating factors such as supporting testimonials, previous good character and the traumatic experience of serving a first prison sentence at the age of 51. Stannard was then sentenced to four and half years imprisonment on each of two counts, the sentences to be concurrent.

The Inland Revenue is seeking to have Stannard’s assets confiscated so as to recover the benefit of the fraud and this is to be considered by the Court on 10 May 2001.

(No longer relevant)
Double Taxation Conventions And Double Contribution Conventions - Update

Double Taxation Conventions (DTCs)

Canada
A further round of talks on a Protocol was held in London in September 2000.

Hong Kong
A limited (shipping) agreement was signed in Hong Kong on 25 October 2000. The agreement has been approved by Parliament and all UK legislative procedures have been completed. It will enter into force once the Hong Kong authorities notify the UK that its own procedures have been completed.

Jordan
A second round of talks was held in London in June 2000 and work continues to conclude a new comprehensive DTC.

Kuwait
The UK/Kuwait DTC entered into force on 1 July 2000 and took effect in Kuwait on 1 January 2001. It will have effect in the UK from 1 April 2001 (for corporation tax) and 6 April 2001 (for income tax and capital gains tax).

Norway
A new comprehensive DTC was signed on 12 October 2000 and entered into force on 21 December 2000. The provisions of the Convention will apply in the UK from 1 January 2001 (for petroleum revenue tax), from 1 April 2001 (for corporation tax), from 6 April 2001 (for income tax and capital gains tax) and in Norway from 1 January 2001.

Qatar
A first round of talks on a comprehensive DTC was held in Doha in January 2001. Work will continue to resolve the few issues which remain outstanding.

UAE
A third round of talks on a comprehensive DTC was held in London in November 2000 and work continues to settle outstanding issues.

United States
Further talks have been held about a new DTC and these are continuing.

Double Contribution Conventions (DCCs)

Japan
The new DCC entered into force and took effect on 1 February 2001.

Other Developments

Taiwan
Talks have been held about the possibility of an arrangement between the British Trade and Cultural Office in Taipei and the Taipei Representative Office in London to deal with double taxation.

Representations

General representations concerning new DTCs or DCCs, or suggestions about changes to existing treaties, are welcome and should be addressed to:

Mrs Jas Sahni
Inland Revenue
International
Victory House
30-34 Kingsway
London WC2B 6ES

Queries regarding the effects of a double taxation convention on a particular taxpayer’s tax liability should always be referred to the Inland Revenue office responsible for dealing with their tax affairs.

Further Information

Further information on double taxation and related issues can be obtained via the Internet on the Inland Revenue website at www.inlandrevenue.gov.uk

Copies of double taxation conventions published from 1997 onwards can be found on the Stationery Office’s website at www.hmso.gov.uk

Copies of older treaties can be obtained from the Stationery Office -

Telephone 0870 600 5522.

Further information on double contribution conventions can be obtained from

Inland Revenue
National Insurance Contributions Office
International Services
Longbenton
Newcastle Upon Tyne
NE98 1ZZ

General double taxation issues arising in connection with estates, inheritances and gifts should be addressed to:

Angela Cole
Inland Revenue
Capital and Savings
Room 121
3rd Floor
New Wing
Somerset House
London WC2R 1LB

Alterations to Old Pension Funds - Pension Sharing on Divorce

Revised extra statutory concession B43

The Inland Revenue today published a revised text of extra-statutory concession B43 which will allow some old pension funds to alter their rules to allow pension rights to be shared on divorce or annulment. The revised extra-statutory concession is effective from 1 December 2000.

Section 608 Income and Corporation taxes Act 1988 allows exemption from tax on the investment income and gains of pension funds approved under legislation in force before 1970. This exemption is, however, subject to certain conditions. They are:

  • No contributions should have been paid to the fund since 5 April 1980; and
  • No alterations have been made since 5 April 1980 to the terms on which benefits are payable.

The restrictions on alterations if Section 608 funds are to remain exempt from tax on their investment build-up poses problems for funds that are required to comply with a pension sharing order or provision. The revised extra-statutory-concession will allow the trust deeds and rules to be altered for these limited purposes included at limb (iii), without the fund losing entitlement to tax reliefs.
The text of the revised concession is set out below.

B43 Alterations to old pension schemes

Where an alteration is made to the terms on which benefits are payable by a fund to which TA 1988 s 608 applies, exemption from tax shall continue to be allowed in respect of the income, commissions, profits and gains applied for the purposes of the fund if:

i) the alteration provides for pensions in payment to be increased by an amount not exceeding the rise in the retail prices index or at a fixed rate of up to 3 per cent a year compound (whether or not the increase in the retail prices index reaches that level);

ii) subject to the conditions below, the alteration allows for pensions to be commuted in full to a lump sum where the total benefit payable under all schemes in respect of the employment does not exceed the value of a pension of £260 a year;

iii) the alteration is in order to give effect to any pension sharing order or provision as is mentioned in section 28(1) Welfare Reform and Pensions Act 1999 (rights under pension sharing arrangement) whereby pension rights are shared on divorce or annulment.

The conditions applying to limb (ii) of this concession are that either:

a) the administrator of the fund should make no reduction in the amount of commutation payment made to the employee on account of any income tax borne by the administrator when making the payment; or

b) the employee, having been made aware of the tax consequences, has agreed to the commutation payment.

(No longer relevant)
Enterprise Management Incentives (EMI) changes announced in Budget 2001

We have been asked to clarify the date from which the EMI changes announced in Budget 2001 will take effect.

The EMI changes announced in Budget 2001 will take effect from Royal Assent of the Finance Bill 2001. The clauses as drafted in Finance Bill 2001 will not be retrospective.

The changes will come into force as follows:

  • Removal of the 15 employee limit.
  • Increase to £3 million in the market value of shares over which EMI options can be outstanding at any one time.
  • Removal of the term “key”.
  • Extension of the time limit for notification of the grant of EMI options from 30 to 92 days.

For options granted from Royal Assent

  • Removal of the requirement for prior approval for alteration to share capital.

For alterations to share capital from Royal Assent

  • Alteration to calculation of tax/NICs payable on exercise.

For options exercised from Royal Assent

In addition to the proposed legislative changes the Inland Revenue will:

  • Offer an advance assurance on whether a company qualifies for EMI.

From 5 April 2001

Changes made to streamline the process for submission of notification documents where a company has granted more than one EMI option have already taken effect.

For further information please see the share schemes website at www.inlandrevenue.gov.uk/shareschemes


The Inland Revenue
The Chartered
Institute of Taxation
HM Customs &
Excise

Tax Avoidance - Exploring the Boundaries

Joint Conference with CIOT, Inland Revenue and Customs and Excise to take place at

Latimer House, Buckinghamshire 29 - 30 June 2001

This conference will cover:

The meaning of Tax avoidance
Avoidance vs evasion - where is the boundary?
The Documents in the case - what can the taxman see?
Ramsay and Furniss - where is the line now?
The get-out clause - sole or main benefit: do they work as planned?
VAT and property - how businesses avoid VAT
The offshore dimension - using tax havens
The moral maze - are some schemes beyond the pale?
The case for a GAAR - will it be back?
Would simplification help?

The booking form for this conference is available from the CIOT. Telephone: 020 7235 9381. You will also find it on the website at www.tax.org.uk.

Inland Revenue Statements of Practice and Extra-Statutory Concessions issued between and 1 February 2001 and 31 March 2001.

Extra-Statutory Concessions
Number Title Date of Issue
B43 Alterations to Old Pension Funds - Pension Sharing on Divorce 14/04/01
Statement of Practice
Number Title Date of Issue
SP2/01 Application of local currency rules in Finance Act 2000 to partnerships which include companies 28/02/01
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, 1st Floor Victory House, 30-34 Kingsway, Kingsway, London WC2B 6ES or e-mail sarah.guerra@gsi.ir.gov.uk. We are sorry though that neither she nor our contributors will normally be able to enter into correspondence about Tax Bulletin or its contents.

Subscription

The subscription for 2001 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 Mrs F. Chowdhury, Ground Floor, Victory House, 30-34 Kingsway, London WC2B 6ES. Telephone: 020 7438 7812. 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, 1st Floor, Victory House, 30-34 Kingsway, London, WC2B 6ES.

 

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

 

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