Inland Revenue Tax Bulletin - Issue 53

Contents

Interpretations

Miscellaneous

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 This Article Is No Longer Current (Deleted Index 2004)

Income Tax Self-Assessment (ITSA) Returns for 2000-01

As we start to receive the 2000-01 income tax return forms we have tried to identify areas which have caused concern in the past, to see how we can help avoid any problems this year. This article gives a brief outline of our position on three issues:

  • signatures on ITSA return (and other) forms;
  • using provisional figures in returns;
  • rejecting unsatisfactory return forms.

1. Signatures

Section 8(2) Taxes Management Act (TMA) 1970 requires that every return should include a declaration by the person making the return to the effect that the return is to the best of his knowledge correct and complete. We consider that the obligation to make this declaration is one which the person making the return cannot delegate. Accordingly, it is normal practice to insist that a paper return should be signed by the taxpayer personally. Similarly, where the taxpayer makes a return using the Internet service for Self Assessment the return should be personally authenticated by the taxpayer using their confidential password and User ID. Where an agent sends in the return electronically the taxpayer must sign a copy of the return before the electronic version is sent. The exceptions to this are where, because of the age, physical infirmity or mental incapacity of the taxpayer, they are unable to cope adequately with the management of their affairs or where their general health might suffer if they were troubled for a personal signature. In such special circumstances we accept the signature of an attorney who has full knowledge of the taxpayer's affairs.

In all other cases we expect the return to be signed by the taxpayer. If the signature does not appear to be that of the taxpayer we will reject the return form as not satisfying the requirements of S8 TMA 70. The form will be sent back to whoever submitted it (taxpayer or agent) with an explanation. If this is close to the filing deadline there is a risk of incurring a late filing penalty (see "unsatisfactory returns" below). Where the taxpayer is travelling a lot, working or living abroad, we expect them to make arrangements with their agent to ensure that they do sign the return form in time to file by the statutory deadline.

It is worth noting that we also need the taxpayer's signature on the form 64-8, giving an agent authority to receive Revenue documents on their behalf. We cannot pass any information to, or discuss the client's tax matters with, the agent without the taxpayer's signed authority. We may ask for another form 64-8 to be completed if it is not clear that an authority we have already received has been signed by the taxpayer.

2. Provisional figures

Our approach to handling returns containing provisional figures evolved over the first couple of years of income tax self assessment. We explained our position on the use of provisional figures in returns in Tax Bulletins Issue 37 (October 1998) and Issue 44 (December 1999). The first addressed the issue in detail for 1997-98, and TB44 reiterated the message for 1998-99 returns.

We are now in the fifth year of self-assessment. Our view of the legal position has not changed. There are limited circumstances in which we can accept provisional figures as meeting the obligation to file a return and these were set out in detail in TB37 (pages 593-6). But we are now clear that a return containing unjustified provisional figures should be returned to the taxpayer or agent. Our guidance to staff (for example in Enquiry Handbook at EH260) has been updated to explain this approach as appropriate for current and future self-assessment returns.

Where a provisional figure is used we require the taxpayer to tick box 23.3 (for 2000-01 return) and to use the additional information section on the last page of the core return to give:

  • an acceptable explanation for the delay in providing final figures, AND
  • a date by which they expect to provide the final figure.

Unless both of the above are given we will reject the return as not satisfying the requirements of Section 8 TMA 70.

We will not regard pressure of work either on the taxpayer or their tax adviser, or the complexity of the taxpayer's affairs, as reasons for accepting a return containing provisional figures.

3. Rejecting unsatisfactory return forms

In the past we have allowed a 14-day period of grace (when we do not charge a fixed late-filing penalty) where we have sent back an ITSA return form, received on or before the filing deadline, because something is missing. Tax Bulletin 37 said "we will be monitoring the operation of the concession this year and, depending on the outcome, may recommend that it is established as a formal Extra-Statutory Concession". We have reviewed the operation of the period of grace and have decided to continue the practice for 2000-01 returns. We have not decided, at this stage, to establish the period of grace as an Extra-Statutory Concession. Instead we are including this within wider options under consideration to help and encourage people to file on time.

In Tax Bulletin 37, and in other places, we have referred to these returns as "incomplete returns". We now believe this could be misleading. A return from which income has been omitted is "incomplete" but it is still a return under Section 8 TMA 70. We would deal with the omission by opening an enquiry and not by sending the form back to the customer. We are sorry to introduce new terminology but in future we shall refer to returns we reject at the processing stage as "unsatisfactory returns", because they fail to satisfy S8.

We will send back a return form when it fails to satisfy the requirements of S8 TMA 70. Some examples of an unsatisfactory return form are those:

  • not in the prescribed form (standard Revenue form or agreed alternative);
  • not signed by the person making the return;
  • with a box ticked on page 2 (to say a supplementary page is needed) but the relevant pages not attached;
  • containing unjustified provisional figures (see requirements above).

Unsatisfactory returns (those failing to satisfy S8) will be sent back to whoever submitted them (taxpayer or agent) with an explanatory letter. Where an unsatisfactory return form is received before the filing deadline the customer has until the normal filing date to send back a satisfactory return. In past years we have applied the 14-day period of grace to all unsatisfactory returns received on or before the filing date. We realise this is unnecessary and could be viewed as coercive because until we are within a fortnight of the filing date the customer has longer (up to the filing date) in which to file.

If we receive an unsatisfactory return form on the filing date, or within the previous 13 days we will not charge a late-filing penalty if a satisfactory return is then received within 14 days from the date of our letter sending back the unsatisfactory return. We will also allow a 14-day period of grace where an unsatisfactory return was received earlier but not sent back until on or after the date 13 days before the filing date.

For example: an unsatisfactory return form, to which the 31 January filing date applies, received on any day from 18 January to 31 January will be sent back with a letter allowing the 14 days period of grace. An unsatisfactory return form received on 10 January but not sent back until the 20 January will also be given the benefit of the 14 days. An unsatisfactory return form received and sent back on 11 January would not be given the 14 day period of grace because it is not needed (the customer has 20 days to 31 January). An unsatisfactory return form received on 1 February, or on any day after, is already late and the customer will be asked to send a satisfactory return as soon as possible. We will not give the 14 day period of grace in these cases.

Our aim in doing this is not to penalise someone who has genuinely forgotten something, such as signing the return. The 14-day period of grace will not be given in cases where the taxpayer appears to be using deliberate delaying tactics (for example, unjustified provisional figures put into a last-minute return year on year).

Returns received after the statutory filing date will not have the benefit of any period of grace.

The Late Notification Penalty (This section has been superseded by Tax Bulletin 53 Amendment)

This article is about the Class 2 National Insurance contributions (NICs) late notification penalty. With effect from 31 January 2001, anyone who becomes liable to pay Class 2 NICs must register within 3 months from the end of the month in which their liability commenced in order to avoid a penalty of £100.

Lord Grabiner's recommendations

In his report on the informal economy in March last year, Lord Grabiner expressed concern that people in business can drift into the hidden economy. They then find it difficult to put their affairs in order and so take advantage of the support advice and business opportunities available to those operating in the formal economy. Lord Grabiner recommended that:

  • More assistance should be given to the newly self-employed at the outset to avoid trouble later on with the revenue departments and possibly other regulatory bodies; and
  • To facilitate the provision of support there should be an effective requirement to notify the Inland Revenue on or soon after the start of business.

Consultation

In October 2000 the Inland Revenue published Starting up in business a consultation paper setting out its proposals for implementing these recommendations. The paper proposed:

  • Streamlining the process for the newly self-employed to register for NICs purposes, and for this registration to trigger the provision of information and support to them;
  • Improving that information and support; and,
  • Making the existing requirement for the newly self-employed to register for NICs purposes more effective by imposing a fixed penalty if it is not done within a reasonable time.

Legislation Amendments

Previously, regulation 53A of the Social Security (Contributions) Regulations 1979/591 required anyone becoming liable to pay Class 2 NICs to notify Inland Revenue immediately. This requirement was effectively unenforceable as liability to pay Class 2 NICs starts in the week in which people start working for themselves. The amendments to regulation 53A, which are now found in regulation 87 of the consolidated Social Security (Contributions) Regulations 2001 SI No 1004 (the Contributions Regulations) retain the requirement to notify liability immediately. However, regulation 87(4) effectively provides a defined time limit for registration in order to avoid the new penalty.

Comments made on the consultation paper proposals for a registration time limit pointed to the difficulty of establishing a precise date on which self-employment starts. We decided that a deadline at the longest of the proposed periods - 3 months - was sufficient to ensure that proper business records were kept from the early days of a new business and that the newly self-employed person was able to access help, guidance and support from the start. Consequently anyone starting in self-employment is now required to register with the Inland Revenue within three months from the end of the calendar month in which they start self-employment: if they fail to do they can incur a fixed penalty of £100. So, a person who started self-employment on or before 31 January 2001 must have registered by 30 April, otherwise the penalty could be imposed from 1 May 2001. Anyone starting during March 2001 must register by 30 June 2001 to avoid the penalty, and so on.

Failing to register in time

Registrations for Class 2 NICs and administration of the new penalty will be dealt with centrally by the National Insurance Contributions Office (NICO) at Newcastle-upon-Tyne. The majority of late notifications will be identified by NICO when the individual registers by phone or in writing. Regulation 87(3) of the Contributions Regulations provides that a penalty is incurred for lateness unless the self-employed person can:

  • Provide a reasonable excuse for failing to notify in time. NICO will apply the criteria set out in the paragraph 5060 onwards of the Investigation Handbook, which is available on the Inland Revenue website; or,
  • Show that throughout the period between starting self-employment and registering, their earnings were less than the pro rata equivalent of the annual Small Earnings Exception limit (£3825 in 2000-2001 and £3995 in 2001-2002).

When a penalty is imposed a bill will be issued advising the person to make their payment by cheque to NICO Central Banking Services. If the individual disputes the penalty, the bill explains that they can avoid it by showing their earnings were below the Small Earnings Exception limit, or if they have an reasonable excuse for failing to notify commencement of their Class 2 liability within the time limits. The bill will give the contributor an address and telephone number of who to contact at NICO if they wish to dispute the penalty. If the dispute cannot be resolved a formal decision will be issued which will carry a right of appeal to the General Commissioners. The contributor will have 30 days to either lodge their appeal or pay the penalty.

If the person does not pay the penalty and makes no appeal against the decision, or their appeal is rejected and no payment is made, normal recovery action will follow along with recovery of any tax and NICs that may be due.

Notification of Income tax liability

There is a separate requirement, under section 7 Taxes Management Act 1970 (TMA), to notify chargeability to tax within six months of the end of the tax year. This requirement does not apply to people who have been sent a tax return for the year in question. Most people who register for Class 2 NICs liability will be sent an Income Tax Self Assessment tax return for the year they start business. They will therefore not need to give separate notice of their chargeability to income tax for that year.

People who, when registering for Class 2 NICs, say that their income will be too small to be taxable, will not be sent an income tax return. If it turns out that they are in fact taxable for any tax year, they will need to tell the tax office within six months of the end of the year. Otherwise they could be charged penalties under section 7(8) TMA.

Employees who already pay the maximum amount of NICs through Class 1 will not need to register for Class 2 NICs when commencing self-employment. Unless they already receive a tax return, they will need to tell the tax office of any liability on their self-employed income. Again, they must do this within six months of the end of the tax year.

Publicity

Publicity was given about the new arrangements for registering for Class 2 NICs in Inland Revenue news releases dated 10 January 2001, 23 February 2001 and 24 April 2001. The News releases along with the consultation document, the amendment Regulations and the new Starting up in business support guide and leaflet can be found on the Inland Revenue website. www.inlandrevenue.gov.uk/startingup/index.htm

Contact Point

Jenny Fox
Cross-Cutting Policy
Victory House
30-34 Kingsway
London
WC2B 6ES

Tel: 0207 438 7544

Changes to Income Tax Self Assessment Machinery Legislation

Finance Bill 2001, which became law following Royal Assent on 11 May 2001, introduced some changes to the income tax self assessment (ITSA) legislation in Taxes Management Act 1970 (TMA).

Amending ITSA returns

A customer has 12 months from the statutory filing date to amend their return. The law now makes it clear that the return includes the self assessment, or tax calculation, figures. The customer can use this right even when an enquiry is in progress. But any amendment made during an enquiry does not take effect until completion of the enquiry. At completion we will deal with any self-amendment, made during the enquiry, in our closure notice.

Rejecting Revenue corrections

We have always allowed customers to reject our correction of an obvious error where they do not agree anything was wrong. Finance Bill 2001 has now given the customer the legal right to do this. A Revenue correction can now be reversed by notice within 30 days of the correction notice.
In making this a legal right we are not seeking to restrict the time-scale to a shorter period than has operated in the past. We want to keep the flexibility we had when this was a matter of practice only. Guidance to staff tells them that where a customer wants to reverse our correction we should do so if it is at all possible, even if the 30 days has past.

We can do this by using our 9-month correction window, the customer's 12-month self-amendment window or (as a last resort) our enquiry right. If the customer self-amends only in order to reverse our correction we shall not see that as giving us a separate enquiry right into that amendment.

The change is that a customer now has the legal right to make us reverse a correction within 30 days but we will also make the reversal in any period where the law allows us, or the customer, to amend.

Enquiry Window

The wording at Sections 9A and 12AC TMA has changed to make it clear that for 2001-02 returns and future years the time in which we can open an enquiry into a return (filed on time) is 12 months from the filing date. The normal enquiry window will be up to 31 January. Returns for 1999-00 and for 2000-01 are not affected. Their enquiry windows will end on 30 January 2002 and 30 January 2003 respectively.

The first time this new wording applies will be for 2001-02 returns with a filing deadline of 31 January 2003 and an enquiry window ending on 31 January 2004.

Enquiries

The enquiry right has been substantially rewritten to clarify that an enquiry into an ITSA return includes anything in that return, including a claim or an amendment and anything which should be in the return. We see this as a clarification and not as changing the law. The provision about Revenue "jeopardy amendments" has moved from S28A to S9C.

Referring questions to Special Commissioners during an enquiry

A new right to make a joint referral to the Special Commissioners will be introduced at a later stage. The primary legislation is at Sections 28ZA to 28ZE TMA. But the mechanism cannot be used until new regulations are made by the Lord Chancellor's Department (and approved by Scottish Ministers) to allow Special Commissioners to hear and decide these joint referrals.

The new referrals will allow matters to be heard while evidence is fresh. The referrals must be jointly made by the Revenue and the customer and will only be worthwhile in complex cases where the enquiry will not be completed for a number of years. In most cases it will be easier to complete the enquiry first and address any contentious issues through an appeal against the closure notice.

This new right will apply to CTSA enquiries also.

Completing ITSA enquiries

The way we complete an enquiry and make subsequent amendments has changed. Legislation at Sections 28A (individual return), 28B (partnership return) and paragraph 7 of Schedule 1A TMA (claims outside a return) simplifies the process. We must now issue a notice that states our conclusions, including that no changes are needed, and makes any amendments. The customer has the usual 30 days in which to appeal if they do not agree with our conclusions or amendments.

Due dates

The due dates for tax to be paid or repaid following an amendment are clarified and listed in a new Schedule 3ZA TMA. The basic rule is 30 days after notice is given.

Compensation Paid on Bank Accounts of Holocaust Victims

There is a new extra-statutory concession A100 relaxing the normal tax rules on compensation paid by banks on unclaimed accounts, opened by Holocaust victims and frozen during World War II.

Under a British Bankers' Association (BBA) initiative called "Restore UK", a list of named accounts frozen during the War under the Trading with the Enemy Act, and subsequently held by banks as dormant accounts, was published on the BBA web-site in May 2000. People are invited to submit a claim where they believe that the monies in an account belong to them, either as the original investor, or as a beneficiary of their estate (either directly or indirectly through the estate of another beneficiary).

Where claims are received under the "Restore UK" scheme, the banks consider the information provided by the claimant, and, if they find a matching account, transfer the money to the claimant. Where the monies were invested by a victim of the Holocaust and the claimant is either the original accountholder or a beneficiary of the accountholder, the banks have agreed to make an exceptional compensation payment. This payment takes account of inflation that has occurred since the account was frozen. This is more generous than the normal arrangements for interest on dormant accounts, which apply in other cases where account holders were not victims of the Holocaust. As a general rule, income tax would be payable on the compensation payment, and death duties on UK account balances at death.

On VE Day last year the Government announced that a blanket tax exemption would be given on any compensation paid by banks in respect of monies paid out under the "Restore UK" scheme (see news release of 8 May 2000 available on the Inland Revenue website). Publication of the new ESC was announced in the Inland Revenue Press Release of 30 April 2001 (also available on the Inland Revenue website). More details of the "Restore UK" scheme can be obtained from the BBA (telephone 020 7216 8909) and on the web site www.restoreuk.org.uk

The text of the new concession that exempts the compensation payments is set out below.

A 100 Tax exemption for comepensation paid on bank accounts owned by holocaust victims

Under income tax law, compensation payments made in respect of dormant bank and building society accounts normally represent interest, and are therefore strictly subject to the Tax Deduction Scheme for Interest. That means such interest would generally be paid by a bank or building society net of tax to an individual investor unless the individual:

  • is a UK non-taxpayer and has completed a registration form R85 to that effect and handed it to his or her bank or building society; or
  • is not ordinarily resident in the UK and a declaration to that effect on form R105 has been obtained by the bank or building society.

Furthermore, death duties (estate duty, capital transfer tax, or inheritance tax, as appropriate) are potentially chargeable on UK account balances at death (even if the accountholder had no other UK connection).

Under an initiative called "Restore UK", and announced on 8 May 2000 by the British Bankers' Association, compensation is being paid by banks on unclaimed accounts opened by Holocaust victims and frozen during World War II under the Trading with the Enemy Act 1939. Where the investor of the monies in the unclaimed account was a Holocaust victim, the banks have said they will make an exceptional up-rating payment.

No tax will be payable on any monies paid out by banks or building societies under the "Restore UK" initiative to Holocaust victims or their beneficiaries. This exemption will cover income tax liabilities on any compensation payments made on or after 8 May 2000 under the scheme, as well as death duties in respect of the capital held in the accounts.

Interpretation

Capital Gains Tax - taper relief: meaning of 'trading company' and related issues Paragraph 22 Schedule A1 TCGA 1992

Introduction

We have received a number of enquiries from taxpayers and their advisers about the meaning of a 'trading company' and 'holding company of a trading group' (as defined in paragraph 22 Sch A1 Taxation of Chargeable Gains Act (TCGA) 1992) for the purposes of capital gains tax taper relief.

The 1998 Finance Act introduced taper relief for chargeable gains accruing to individuals, trustees and personal representatives on or after 6 April 1998. Generally, the amount of taper relief will depend on the length of time the asset has been held and whether or not it is a 'business asset'. This article is relevant to when shares may qualify as business assets or a company may be a qualifying company.

Finance Act (FA) 2001 contains provisions to extend the business rate of taper relief to some employee shares in non-trading companies from 6 April 2000. The question of the trading status of the company may therefore concern fewer persons.

The legislation

Shares as business assets and qualifying companies
Paragraph 4 Sch A1 sets out the conditions for shares to qualify as business assets and paragraph 6 Sch A1 (as amended by S67 FA 2000) the companies which are qualifying companies in relation to the person making the share disposal. Where a company is a qualifying company in relation to that person the business rate of taper relief may be due wholly or in part on any chargeable gains arising on the disposal. This question as to what is a qualifying company may also be relevant to persons who dispose of assets used in a trade carried on by their qualifying company.

Interpretations

Trading company
Paragraph 22 Sch A1 states that a trading company is a company which is either "a company existing wholly for the purpose of carrying on one or more trades" or a company that would fall within that definition "apart from any purposes capable of having no substantial effect on the extent of the company's activities". The various elements which make up this definition are discussed in further detail below.

Wholly
In the context of the definition of a trading company we would take 'wholly' to mean that the company had no purpose other than to trade. Wholly therefore means solely.

Whether something is wholly for a trading purpose can only be considered in light of the requirements of the company's trade. One common situation is where a company sets aside funds and receives investment income. The fact that investment income is generated does not automatically lead to the conclusion that a company's purpose is not wholly trading. Whether the generation of income from investments is or is not evidence of a non-trading purpose must ultimately depend on the nature of the company's trade and whether the holding of the investment is closely related to the conduct of that trade. If it can be shown that holding any investment is integral to the conduct of the trade or is a short-term lodgement of surplus funds held to meet demonstrable trading liabilities, then this is unlikely to be taken as evidence of non-trading purposes. For example, if a company has surplus funds which it intends to use for an expansion of the trading business in the near future, and it invests these in equities in the short term, then it may be that the company's purpose continues to be wholly trading during the period those equities are held.

A company which makes an investment falling outside the categories above (which may include acquiring and retaining a holding of shares in another company as part of a wider business strategy beyond that related to the requirements of the trade) still has the safety net of the "substantial test" (see below). Examples of such investments include those made in the expectation of a return in the longer term and those offering unrelated, indirect or non-specific benefits to the company's trade.

Purpose
Companies will usually have wide powers to carry on activities but will often only engage in a few. We can confirm that only those purposes which are reflected in the activities, or intended activities, of the company fall to be taken into account. The comparison will be of actual circumstances at a particular point in time and not of the scope of a company's powers under its articles and ambitions not seriously in contemplation.

In order to establish purpose we have to look at the taxpayer's 'object' in mind at any point in time (see, for example, Morgan v Tate and Lyle, 35TC367). Subsequent events are irrelevant except as a reflection of the taxpayer's state of mind at the time the expenditure was made. Purposes, in the case of companies, can probably only be established by looking at the intentions of the directors at a particular moment as well as looking at the transactions themselves. This is important because similar transactions by different companies (e.g. buying shares) may be for different purposes.

A company might cease being dormant and be actively preparing to trade but not actually trading. We would accept that such a company was a trading company from the point at which it had substantially trading purposes, even if this was before it commenced to trade. However, in the case of close companies, paragraph 11(3) Sch A1 would deny taper relief before trading commenced, if it did in fact commence.

Trade
'Trade', for taper relief purposes, means anything which is a trade, profession or vocation within the meaning of the Income Tax Acts and is conducted on a commercial basis and with a view to the realisation of profits. It also includes any Schedule A business (within the meaning of the Taxes Act) which consists in the commercial letting of holiday accommodation in the United Kingdom as defined in S504 of that Act. We can confirm that activities, such as farming, that are treated as a trade by S53 Income and Corporation Taxes Act (ICTA) 1988, will also be trades for the purpose of paragraph 22.

Capable and activities
In the case of trading companies the question is whether non-trading purposes are 'capable' of having no substantial effect. In our view this requires an objective assessment at any point in time as to whether it can be shown that this is the case rather than that it is theoretically possible.

Substantial
Paragraph 22, Schedule A1 refers to a 'substantial effect on the extent of the company's activities.' The word substantial is used in various sections of the Act to provide some flexibility in interpreting a section without opening the door to widespread abuse of a relieving provision. We consider that substantial here means 'more than 20%'. It is therefore necessary to consider what should form the basis for measuring whether a company's non-trading purposes are capable of having a substantial effect. We consider that this will vary according to the facts in each case but some or all of the following might be taken into account in reviewing a particular company's status:

  • Turnover receivable from non-trading activities

    For example, a company may have a trade but also let an investment property. If receipts from the letting were substantial in comparison to the combined trading and letting income then, on this measure, this would probably not be a trading company for taper relief purposes.

  • The asset base of the company

    If the value of non-trading assets was substantial in relation to trading and non-trading assets then again, on this measure, this would not be a trading company for taper relief purposes. In other cases holding on to an asset which had increased in value may indicate non-trading purposes if the company lacks liquid resources to develop it or too much time is spent looking after it (but see below regarding surplus trading premises). In some cases it might be appropriate to take account of intangible assets (e.g. goodwill) that are not shown on a balance sheet in considering a company's purpose. Current market value, cost and amounts given by way of consideration for assets may all be appropriate measures of the value of assets.

  • Expenses incurred by, or time spent by, officers and employees of the company in undertaking its activities

    For example, if a substantial proportion of the expenses of a company were incurred on non-trading activities then, on this measure, the company would not be a trading company.

The historical context of the company may be relevant. For example, it is quite possible that at an instant in time certain receipts may not be insubstantial but, if looked at on a longer timescale, they may. Looking at the historical context therefore a company might be able to show that it was a trading company at a particular point in time.

It may be that some measures point in one direction and others in the opposite direction. We would weigh up the impact of each of the measures to balance the effects of measures that point in different directions in coming to a view. If, at the end of the day, the inspector was unable to agree the status of a particular company for a period then this matter could only be ultimately established as a question of fact before the Commissioners. However, we anticipate that these cases will be relatively rare.

Holding company of a trading group
Para 22(1) defines a holding company as 'a company whose business (disregarding any trade carried on by it) consists wholly or mainly of the holding of shares in one or more companies which are its 51% subsidiaries'. The fact that such companies may be investment companies for the purpose of corporation tax does not mean that they cannot also be classed as holding companies for taper relief purposes.

We can confirm that 'wholly or mainly', in this context, means more than half of whatever measure is reasonable in the circumstances of the case.

A company that is the holding company of a group may let properties it holds to subsidiaries for use in the subsidiaries' trades. We can confirm that the fact that rent is paid by the tenant company would not in itself be a transaction to bring into account when considering whether or not a company is a holding company, even if a market rent were charged. Other intra-group transactions, such as inter-company lending and the use of intellectual property, are equally within this approach. This approach would not extend to transactions with qualifying joint venture companies (other than 51% subsidiaries).

Trading group
Paragraph 22 of Schedule A1 to TCGA defines a trading group as "a group of companies the activities of which (if all the activities of the companies in the group are taken together) do not, or not to any substantial extent, include activities carried on otherwise than in the course of, or for the purposes of, a trade". The focus here will be on the actual activities of the group in determining non-trading purposes rather than those activities that a group might be permitted to engage in.

The expression "all the activities taken together" in the definition of trading group should be taken as meaning that all intra-group activities are disregarded for the purpose of the financial tests. So, for example, where one group company lets a property to another group company, the letting activity would be disregarded. However, this netting off approach would not be extended to transactions with qualifying joint venture companies (other than 51% subsidiaries), so letting property to a JVC would be an investment activity.

Qualifying joint venture investments
Where a company is treated by para 23 Sch A1 (S67(6) FA 2000) as having a qualifying shareholding in a qualifying joint venture company (as defined) the holding of these shares is disregarded. The investing company shall be treated as carrying on an appropriate proportion of the activities of the joint venture company. Similar provisions apply to determine if a company is the holding company of a trading group.

Shares and other assets held otherwise than as investments
Companies may acquire shares or other assets for reasons other than investment. For example, companies may be paid in shares instead of cash as fees for services rendered or work carried out. Once such shares have been acquired the reasons for retaining them will need to be considered and whether or not their retention means that a company has non-trading purposes. Among other issues, regard would be had to the reasons why the shares were taken instead of cash or credit, whether they can reasonably be turned into cash or otherwise exchanged to meet trading requirements.

A company may have to hold shares in another company as a pre-requisite to trading (for example, companies may be expected to own shares in a trade organisation). In such cases regard may be had to the reasons for holding the shares in deciding if a company had non-trading purposes.

Corporate Venturing Scheme (CVS)
The CVS is aimed at companies considering direct investment, in the form of a minority shareholding, in small independent higher-risk trading companies or groups of such companies. It provides tax incentives for corporate equity investment in the same types of companies as those qualifying under the Enterprise Investment Scheme (EIS) and Venture Capital Trust (VCT) scheme. The incentives are available in respect of qualifying shares issued between 1 April 2000 and 31 March 2010.

We have been asked if a company making corporate venturing investment(s) could be considered to have ceased to be a trading company, or, where appropriate, the holding company of a trading group, for the purpose of business asset taper. Regardless of the purpose for which the investing company exists, the holding of investments will not have any bearing on a company's status as a trading company for taper purposes unless, together with other non-trading purposes, it is capable of having a substantial effect on the extent of the investing company's activities.

The scheme works in such a way that it is very unlikely that making CVS investments will prevent a company being a trading company for taper relief purposes. This is because to qualify as a CVS investing company (there are equivalent provisions in respect of group companies):

  • the company must exist wholly for the purpose of carrying on one or more non-financial trades, apart from any incidental purposes which have no significant effect on the extent of the company's activities; and
  • a holding of shares to which CVS investment relief is attributable would be significant where it amounted to a substantial part of the investing company's business.

So an investing company that qualifies for CVS is very unlikely to have more than the 20% investment activity that would stop it being a trading company for taper relief.

In addition, when assessing for taper relief whether the investment element relating to a CVS shareholding contributes to exceeding 20% of a company's activities on various measures, companies should be careful to distinguish between activity in connection with the investment element and that which relates to the 'partnership' element. The whole of the value of the CVS shareholding will be an investment purpose when looking at an assets based measure. But when looking at a measure such as directors' time spent, only that part of the investing company's directors' time that is spent in connection with the share-holding itself (buy, sell, value monitoring) is an investment purpose; the time spent on the closer working relations between the two companies' trades that is the policy purpose of CVS should normally be seen as in support of trading purposes.

Where companies are in doubt as to their entitlement to relief as an investing company under CVS, and as to their trading status for taper relief, they should raise both issues with their inspector as set out below.

Companies moving in and out of being a trading company or holding company of a trading group
If a company moves in and out of 'trading company' status it may be necessary for any gain on the disposal of shares to be apportioned for the periods when the company was and was not a trading company. This may not be necessary where the taper provisions in FA 2001 apply to relevant employees.

In the case where a company goes into liquidation it is unlikely to be trading during the period of the liquidation. If so, it may be necessary to apportion the gain on the shares.

Surplus trading property
We have been asked how property owned by a company and surplus to its immediate business requirements should be dealt with. Each case would need to be considered in light of the facts. We would not, for example, regard the following as necessarily indicating a non-trading purpose:

  • letting part of the trading premises;
  • letting properties that are no longer required for the purpose of the trade, where the objective is to sell those properties;
  • subletting property where it would be impractical or uneconomic in terms of the trade to assign or surrender the lease. For example, the benefit derived from disposing of the lease may be outweighed by the reverse premium payable.
  • the acquisition of property (whether vacant or already let) where it can be shown that the intention is that it will be brought into use for the purpose of the trade.

What to do if you want to know if a company is a trading company or the holding company of a trading group

Our advice to taxpayers is that in the first instance they should contact the company in which they hold the shares. If they cannot obtain an answer from the company, they should submit their tax returns using their own judgement.

Where a company wishes to establish its status for any accounting period that has ended, we have asked that districts should respond positively to requests for a view.

Any assurance given that a company is or is not a trading company can relate only to the period under consideration. It is possible for a company to change its status at any time, as its business position changes. It will be important for the company to continue to reappraise its position in future and to come back to the inspector if it is in doubt because of changed circumstances.

(Superceded by TB62 page 982)
Meaning of 'carrying on a business of holding investments' in para 11(4) Sch A1 TCGA 1992

Paragraph 11 Schedule A1 TCGA 1992 is an anti-avoidance rule which may restrict the qualifying holding period of shares in close companies for taper relief purposes. It is designed to prevent any advantage being obtained from activities that could otherwise artificially increase the amount of taper relief given. One such restriction is imposed by para 11(4) where, "at the time of disposal of the shares, the close company was carrying on a business of holding investments" and, within a specified period prior to that disposal, it was either not carrying on that business at all or the business was comparatively small. We have been asked how the meaning of 'carrying on a business of holding investments' for the purposes of para 11(4) should be interpreted. All the interpretations below will be used by the Inland Revenue in applying paragraph 11.

Meaning of 'business'

The concept of a business is central to parts of the capital gains code. For example, S162 TCGA 1992 concerns the transfer of a business to a company as a going concern and S163 TCGA 1992 provides for retirement relief on the disposal of a business or business assets. In the case of S163, relief is, for example, restricted to assets used in a trade, profession, etc and does not include lettings within
Sch A.

We can draw on case law to understand the meaning of 'business'. As Lord Diplock said in Town Investments Ltd - v - Department of the Environment [1978] AC 359, "the word 'business' is an etymological chameleon; it suits its meaning to the context in which it is found. It is not a term of legal art and its dictionary meanings ... embrace almost anything which is an occupation as distinguished from a pleasure - anything which is an occupation or duty which requires attention is a business".

The next point to note is that 'business' and 'trade' are not synonymous whilst all trades are businesses, there are many businesses that are not trades. Property letting, as opposed to the provision of services to tenants, may be a business though not a trade. The holding of investments can also amount to a business. Indeed, there is judicial support for the view that this does not have to be actively carried on to be a business of making investments (see, for example, CIR - v - The Korean Syndicate Ltd 12 TC 181).

On the other hand, there are several cases where it has been held that a trading company which has ended its main activities but has retained its investment portfolio is not carrying on a business of holding investments. The most recent case is Jowett v O'Neill and Brennan Construction Ltd 70 TC 566.

In that case, Mr Justice Park acknowledged that whilst the normal conclusion, when a company lays out its assets and earns an income return, is that it is carrying on a business there will, as a matter of law, be exceptional cases where the facts indicate that no business is being carried on by the company.

As Park J. pointed out in the O'Neill case, it is the exception rather than the rule that means a company is not carrying on a business when it puts its money on deposit.

What 'business' is within paragraph 11(4) if a company is trading?

Companies that trade may also carry on a business of holding investments. It is however provided by para 11(6)(b) that such a business shall not be taken to include the placing of money on deposit, the holding of shares in 51% subsidiaries and the making of loans to associated companies or participators.

We conclude from the above that activities which include holding shares in another company or making loans outside of the exceptions mentioned above may amount to a business of holding investments. However, where such activities are undertaken by a company which also carries on a trade, the trading context must be reviewed to establish whether a separate business of holding investments exists.

Where a company carries on a trade the question to ask is whether certain transactions are integral to that trade. This depends on the purpose for which a fund or asset is held. Where the holding of investments is to meet current trading liabilities, and forms capital of the trade, it is unlikely that any investments will be within the meaning of carrying on a business of holding investments. However, there will be companies where the holding of investments forms no part of its trade or in any sense represents capital employed in the trade. This is a question that can only be answered in the light of the particular facts in each case.

We can confirm that where a company does no more than invest funds surplus to its immediate trading requirements it will not be regarded as carrying on a business of holding investments under para 11(4) Sch A1. In consequence, neither the initial making of an investment with surplus funds, nor a change in the way the funds are invested subsequently, can constitute a 'relevant change of activity' of the company within the legislation.

Whether particular investments are of funds of a company 'surplus to its immediate trading requirements' is a question of fact. In understanding this expression some assistance may be found in the case of Nuclear Electric plc v Bradley (68TC670). This case concerned a claim to set off trading losses and whether interest received constituted part of the trading income for the purposes of the set-off. It was held that the question as to whether income from investments held by a business was trading income depended ultimately upon the nature of the business and the purpose for which the fund was held. At one end of the scale were insurance companies and banks part of whose business was the making and holding of investments to meet current liabilities. At the other end of the scale were businesses of which the making and holding of investments formed no part. In between those two ends there would no doubt fall other types of business whose position was not so clear.

This issue as to whether particular investments are part of a business of holding investments is similar to the 'excepted assets' requirement of S112(2) Inheritance Act 1984. Excepted assets are those not used wholly or mainly for the purposes of the 'business concerned' in the two years up to the relevant date, nor are they required at that time for future use in the business. In Barclays Bank Trust Co Ltd (SpC 158) the Special Commissioners considered the future use test. The Special Commissioner said:

"I do not accept that 'future' means at any time in the future nor that 'was required' includes the possibility that the money might be required should an opportunity arise to make use of the money in two, three or seven years' time for the purposes of the business. In my opinion and I do so hold that 'required' implies some imperative that the money will fall to be used upon a given project or for some palpable business purpose."

Where funds are, for the immediate future, surplus to current trading requirements then the question will be whether it can be shown that there will be a foreseeable need to use those funds in the trade in the future. If so, then it is unlikely that these will be part of a business of holding investments. If not, then the question has to be asked, at the time of the disposal of the shares, whether the company in question was carrying on a business of holding investments and, if so, whether there has been a previous time when it wasn't or the business was small in comparison to the business at the time of the share disposal. Small, in this context, is taken to mean less than 5% of the size that the business of holding investments has at the time of the disposal.

Property lettings

We have been asked how property owned by a company should be dealt with. The Capital Gains Manual at CG17919 confirms that we would not, for example, regard the following in themselves as amounting to a business of making investments where they are carried out by a trading company:

  • letting part of the trading premises;
  • letting properties that are no longer required for the purposes of the trade, where the long term objective is to sell those properties;
  • subletting property where it would be impractical or uneconomic to assign or surrender the lease.

We can also confirm that where a company acquires property which is let to other companies in the same group for use in a lessee company's trade then this will not be taken into account in deciding if the lessor company is within paragraph 11.

Liquidation

Where a liquidator is appointed to wind up a company which at the time was not carrying on a business of holding investments, the company will not be regarded as commencing such a business for the purposes of para 11 by reason of a temporary investment which the liquidator makes pending a distribution to creditors and/or shareholders of funds arising in the winding up.

Assets acquired and held other than as investments

Sometimes companies acquire shares in another company or other assets for reasons other than investment. For example, companies may be paid in shares instead of cash as fees for services rendered or work carried out. Once such shares have been acquired the reasons for retaining them will need to be considered and whether or not their retention means that a company has a business of holding investments. Among other issues, the reasons why the shares were taken in lieu of cash or credit, whether they can reasonably be turned into cash or otherwise exchanged to meet trading requirements would all need to be considered.

A company may have to hold shares in another company as a pre-requisite to trading (for example, companies may be expected to own shares in a trade organisation). In deciding if a company had a business of holding investments the reasons for holding the shares would all need to be considered.

Paragraph 23 Sch A1 also contains particular provisions relating to the holding of shares in joint venture companies. Where such shares are a 'qualifying shareholding' within the meaning of that paragraph, then this investing activity is disregarded in favour of an appropriate proportion of the activities of the joint venture company in which the shares are held. A qualifying shareholding in a joint venture company cannot therefore, of itself, constitute a business of holding investments. Paragraph 23(9) also provides that the acquisition of a qualifying shareholding is not to be treated as a relevant change of activity for the purposes of paragraph 11.

If the company has a business of holding investments, will Paragraph 11 apply to its shares?

Where the circumstances are such that the company has a business holding investments, there are a number of points to consider which may remove shares held in the company from scope of paragraph 11. Firstly, the investing company must be a close company for paragraph 11 to apply. Secondly, paragraph 11(4) looks at the size of the business being conducted at the time of the disposal of the shares as compared with an earlier period when the level of activity was small or non-existent. Where a company has an ongoing and constant level of investment business it is unlikely that para 11 will need to be considered. Para 11 is concerned with increases in the size of an investment business, measured with reference to twelve monthly periods, rather than the existence of that business. Also, para 11 would not apply where the company's business was not being conducted at the time of the share disposal.

It is also appropriate to bear in mind that, even where the provisions of para 11 apply to exclude a period of share ownership from the qualifying holding period, sufficient time may have elapsed since the last relevant change of activity for the disposal of shares to attract full taper relief.

Corporate venturing scheme

The principles set out above apply equally where a company holds shares under the Corporate Venturing Scheme, introduced by S63 FA 2000 with effect from 1 April 2000.

So, in many situations, it is likely that the holding of shares which have attracted CVS reliefs will not prejudice the company's shareholders from claiming business asset taper relief for a period.

(Superseded by CG17930)

Capital Gains Tax - taper relief: meaning of 'security': Paragraph 22 Schedule A1 TCGA 1992

We have received a number of enquiries about the meaning of 'securities' for taper relief purposes. In particular, we have been asked whether company debentures deemed to be securities by Section 251(6) Taxation of Chargeable Gains Act [TCGA] 1992 and earn-out rights within Section 138A TCGA 1992 are securities for taper relief purposes.

The more generous taper relief for business assets may be due where an individual, the trustees of a settlement, an individual's personal representatives or a legatee disposes of shares that qualify as business assets. The definition of shares in relation to a company in paragraph 22 Schedule A1 TCGA 1992 includes 'any securities of that company'. The meaning of what is a security for taper relief purposes is not further defined by Schedule A1, nor does TCGA 1992 contain a general definition of what is a security.

It is our view that not all debentures will be securities. A security is more than an acknowledgement of indebtedness by a company. Any question as to whether a particular instrument was a security would, in the first instance, be a matter for the relevant inspector of taxes to consider.

Section 132 TCGA 1992, which deals with conversions of company securities, gives limited guidance on the meaning of security in the definition in subsection (3)(b). We accept that a security within the meaning of Section 132 TCGA 1992 is a security for the purposes of taper relief.

The meaning given to "security" in Section 132 TCGA 1992 is also adopted by Section 251(1) TCGA 1992, which refers to "... the debt on a security (as defined in Section 132)". We think it follows that a company debenture possessing the characteristics of "the debt on a security" will be a security in the context of Section 132 TCGA 1992. We therefore accept that any such debenture will also be a security for taper purposes. The courts have held that a debenture issued by a company will have the characteristics of "the debt on a security" if it is capable of being realised at a profit by the person to whom it was first issued. Our views on the characteristics necessary for this to be possible are at paragraphs CG53420 to CG53435 of the Capital Gains Manual.

A debenture issued by a company on or after 16 March 1993, which is not a security, can be deemed to be a security by Section 251(6) TCGA 1992. But this treatment is only for the purposes of Section 251. Schedule A1 does not extend the meaning of security for taper relief purposes to include such debentures. In contrast, Section 117A(10) TCGA 1992 does provide such an extension in the context of assets that are not qualifying corporate bonds for corporation tax purposes. We do not therefore consider that a company debenture which is only deemed to be a security by Section 251(6) is a security for taper relief purposes.

We have also considered whether earn-out rights can be securities for taper purposes. Where an earn-out right is the subject of a valid election under Section 138A TCGA 1992, the Act has effect on the assumption that it is a security within the definition in Section 132 (see Section 138A(2) and (3)(a)). Although this matter is not free from doubt we accept that such earn-out rights count as securities for the purposes of taper relief.

(Superseded by BIM42215)

Interaction of tax and accountancy: 'deferred revenue expenditure'

Background

In February 1999 we published an article in Tax Bulletin 39 on deferred revenue expenditure. We did this as we had been asked to clarify the tax treatment of this kind of expenditure following an earlier article in Tax Bulletin 32 (issued in December 1997). These articles set out our understanding of how the law was changing in this area as a result of court decisions, and how they had led to a closer alignment of tax and accounting.

'Deferred revenue expenditure' in this context means allowable revenue expenditure which has been accounted for by posting the expense somewhere on the balance sheet - whether to fixed or current assets - rather than writing it off immediately to the profit and loss account as it is incurred. The expenditure is then usually written off to the profit and loss account over a period of time, by being charged as an expense or depreciated.

We have become aware that this issue is still being dealt with in different ways. This article aims to clarify the position and re-affirm how the law operates in this area. It also details how we aim to resolve current enquiries on this point, and to cater, as far as practically possible, for any inconsistencies that have arisen. A number of amendments have been made already to Inland Revenue guidance to reflect the views detailed in this article. We will make further changes to ensure that all published material reflects those views (note 1).

The Department has given very careful consideration to the manner in which remaining inconsistencies should be resolved. We have concluded that where we have issued incomplete advice on how to deal with deferred revenue expenditure, the most appropriate course is to apply a cut off date, after which all businesses should consistently adopt the correct treatment in law as described below. The intended approach will also enable any past inconsistencies to be minimised as far as practically possible.

(Note 1: Revenue guidance that has been or will be revised to reflect our view of the law includes IM605f, IM608b, IM608d, IM990a, IM990b, PIM2020 ans IR150 paragraph 157.)

Our understanding of the law

Recent court decisions have presented an evolving view of the interaction of tax and accountancy. It has been well established that there is no rule of law stating that expenditure is tax deductible as it is paid or incurred. For timing purposes, the starting point for tax is the measure of accounting profits as shown by accounts drawn up under generally accepted accounting practice.

This means that expenditure which is revenue in terms of tax law, but which is deferred (or 'capitalised') and shown somewhere on the balance sheet under correct accounting practice, can only be relieved for tax purposes as and when it is posted to the profit and loss account in accordance with generally accepted accountancy practice. Generally this will be when the expenditure is amortised or depreciated. (FRS15, 'Recognition, measurement and depreciation of tangible fixed assets', may be relevant.)

So a computational adjustment to obtain earlier relief on a paid or incurred basis for this kind of expenditure, which is posted to the balance sheet, is no longer acceptable. This treatment, of course, only applies to bona fide revenue expenditure. It is well established in law that capital expenditure is inadmissible for tax purposes, whatever the accounting treatment might be.

Where a depreciation charge includes both revenue and capital elements, any reasonable method of identifying the revenue element will be accepted, provided it is consistently applied, and excludes amounts for which relief has already been given.

The article in Tax Bulletin issue 39 (February 1999) will have alerted people to the impact of these developments. In addition, the judgement in the Herbert Smith case (72TC130) was delivered in February 1999. This case was about provisions, but the judgement also supports the trend in aligning tax and accounting. We issued a Press Release PR138/99 in July 1999 following the Herbert Smith case which explained that, broadly, deductions (for provisions for allowable revenue expenditure) were to be allowed for tax, if they followed generally accepted accounting practice, but that no expenditure could be relieved more than once.

Practical measures

We want to get everybody on the same footing because differing practices have grown up over the years on how to deal with deferred revenue expenditure. But we recognise that there can be practical difficulties in achieving this. Specifically, there may have been doubt over how to deal with revenue expenditure that is posted to fixed assets, as opposed to current assets. We now know that it is irrelevant for tax purposes where revenue expenditure, that is deferred, is held on the balance sheet.

The rest of this article sets out the approach we will adopt to move forward and reach consistency as quickly as possible. It details how we propose to deal with this particular point for all categories of returns.

The cut off

We propose to treat 30 June 1999 as the cut off date from which the correct view of the law should be applied. By this date we think that it is reasonable to assume that details of the new approach would have become known. So we would expect any Income Tax or Corporation Tax return, to the extent that it includes profits or losses shown in accounts for periods starting after 30 June 1999, to be settled in accordance with the law, and not to reflect computational adjustments to give relief for deferred revenue expenditure before it is deducted in the profit and loss account.

Detail

The detail of how this cut off applies is set out in the following paragraphs.

The term "accounts period" refers to a period for which accounts are drawn up.

A return and an accounts period "relate to" each other, if the return includes business profits or losses of the accounts period (disregarding losses and other amounts which for tax purposes can be carried forward or back between one period and another).

A return is "open" in the following circumstances:

a) for periods preceding self assessment

  • the accounts have not yet been agreed, or
  • an appeal has not yet been determined, or
  • a return has not yet been made.

b) for periods where Self Assessment applies

  • the period for starting enquiries, or window for taxpayer amendment, has not yet expired, or
  • an enquiry has been opened, whether or not the specific issue of deferred revenue expenditure is under consideration, or
  • a return has not yet been made.

Otherwise a return is "closed".

Open returns relating wholly to accounts periods beginning after 30 June 1999

If a return related to an accounts period beginning after 30 June 1999 is open, then the tax liability in respect of the profits in the accounts period should be settled in accordance with the correct legal position on deferred revenue expenditure (see above). But where a deduction for the expenditure has already been allowed on an incurred basis the expenditure cannot be allowed again.

Open returns relating wholly to accounts periods beginning on or before 30 June 1999

If a return related to an accounts period beginning on or before 30 June 1999 is open, then the tax liability in respect of the profits in the accounts period will depend on whether the expenditure has been posted to fixed or current assets.

    a) Where expenditure is posted to fixed assets we will accept any related computational adjustment that accompanied the original return thus allowing relief for the expenditure on the old incurred basis. This caters for earlier uncertainty about the law, which gave rise to potentially ambiguous guidance.

    b) Where the expenditure is posted to current assets the return should conform to the correct legal position (see above). There should have been no doubt at all as to the correct way in law that this expenditure should have been dealt with.

Special cases

There may be cases where an open return relates both to an accounts period beginning on or before 30 June 1999, and to one beginning after that date. An example would be an Income Tax return where the profits for the year of assessment are those of a period straddling a 30 June 1999 accounting date.

In this situation, the two accounts periods are dealt with separately, applying the general principles described in this article for open returns related to periods of account beginning respectively on or before, or after, the 30 June 1999 cut off date.

Cases where the return is closed

If the return is closed, the treatment of deferred revenue expenditure can only be raised if the Inspector makes a discovery. In practice a discovery is unlikely as deferred revenue expenditure is usually clearly shown on the face of the computations.

Informal understandings

In the case that an informal understanding has been reached with the Inspector on the treatment of deferred revenue expenditure, this should be reviewed and unwound as soon as practicable. This may involve negotiation with the Inspector depending upon the particular circumstances. The aim is to ensure that all taxpayers are brought onto the proper footing as quickly as possible.

If, owing to exceptional circumstances in any particular case, there are difficulties in applying the approaches detailed in this article, taxpayers should contact their local Inspector for further advice. This Article does not affect any other technical points under enquiry.

Miscellaneous

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

Interest relief for companies within the service company legislation and construction industry scheme

A new Extra Statutory Concession (ESC) has been introduced that affects companies that are within both the service company (IR35) legislation and Construction Industry Scheme (CIS) for the year 2000-01.

Intermediaries such as personal service companies will, in specific circumstances, be allowed to set-off a repayment of Corporation Tax that has arisen as a result of deductions made under the CIS provisions against any late paid PAYE Tax/NIC liability on the deemed payment to reduce any interest charged.

Under the service provision rules, intermediaries such as personal service companies are required to account for the tax and NICs on deemed Schedule E payments arising at 5 April by 19 April. If an intermediary is unable to finalise the calculation of its deemed Schedule E payment by 19 April then interest is charged on any late paid tax and NICs.

Where an intermediary is subject to the service provision rules in respect of income which it has received under deduction under the CIS then, if the intermediary:

  • is a company, and
  • is treated as making a deemed Schedule E payment in any tax year, and
  • in respect of an accounting period which overlaps with a tax year for which a deemed payment is treated as made, is entitled to a repayment as a result of deductions being made under the CIS, then

it may make a claim to match the repayment due to it against any outstanding tax and NICs due on the deemed Schedule E payment.

Where such a claim is made by 31 January following the 19 April when payment is strictly due and that claim is accepted, then interest will not be charged on the amount of late paid tax and NICs which is matched by the repayment up to the date of that repayment.

Companies will need to include in their claim sufficient information to enable identification of the amounts to be matched, including:

  • the intermediary company's accounting period,
  • the amount of the CIS tax to be matched,
  • the serial numbers of the CIS25 vouchers providing evidence of the amount of the tax deducted
  • the amount of tax and NICs to be matched.

Informal economy workers

Tax and Benefits Confidential Helpline continues to offer callers advice on tax and National Insurance on a no-names basis.

Launched last June, the Helpline offers callers working in the informal economy practical help and information to help them sort out their affairs. If callers want to do so, the Helpline can also arrange for them to register for tax and NICs straightaway.

The Helpline telephone number is - 0845 608 6000 and it is open 8am to 8pm Monday to Friday and 8am to 5pm Saturday and Sunday.

(No longer relevant)
An update on double taxation conventions (DTCs) and double contribution conventions (DCCs)

Annula Review

In order to set its treaty priorities each year, the Inland Revenue consults top UK companies, the main representative bodies and other Government departments. Representations from other interested parties are also invited.

The comments received give valuable information on problems with existing treaties and possible gaps in the UK's treaty network.

The Paymaster General, Dawn Primarolo, MP, has recently agreed the negotiating programme for double taxation conventions and double contribution conventions for the year to 31 March 2002. Full details are given in the Inland Revenue Press Release issued on 30 March 2001 and a summary is given below.

DTC Negotiating Programme

  • The top priority is the continuing negotiations with the United States.
  • We hope to complete work on new treaties with France, Georgia, Jordan, South Africa and Qatar.
  • We hope to finalise Protocols to the existing treaties with Canada and the Netherlands.
  • We plan to continue negotiations with Australia, Chile, Germany, Namibia, Taiwan and the UAE.

New/Exploratory Talks

We will consider the scope for further new or updated treaties, as and when circumstances allow. The business community has indicated that they are particularly interested in treaties with Croatia, Iran, Saudi Arabia and Slovenia. The timing of any negotiations with these countries will depend, among other things, on the extent of our other commitments. Please see the note below about representations. (In line with our existing practice we will generally invite country-specific representations before we begin any new negotiations.)

DCC Negotiating Programme

  • There are currently 17 bilateral social security conventions in force which include contribution provisions.
  • The priority for the coming year is to continue work on the DCCs with Chile and Slovakia to ensure they take effect as soon as possible.

Recent Developments

Australia
The first round of negotiations on a new comprehensive DTC was held in London in February 2001.

Chile
A second round of talks on a DTC was held in London in March 2001 and work continues to settle the outstanding issues.

Georgia
A first round of negotiations on a comprehensive DTC took place in March 2001.

Hong Kong
The limited shipping agreement signed on 25 October 2000 entered into force on 3 May 2001. This will take effect in the UK from 1 April 2002 (for corporation tax) and from 6 April 2002 (for income tax and capital gains tax) and in Hong Kong from 1 April 2002.

Lithuania
A comprehensive DTC was signed on 19 March 2001 and will enter into force once the necessary legislative procedures have been completed in both countries.

Representations

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

Mrs Jas Sahni
Revenue Policy, International
Inland Revenue
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 conventions can be obtained from the Stationery Office - Telephone 0870 600 5522. The Statutory Instrument number should be quoted (see list below).

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

A full list of the UK's double taxation conventions is given below.

a) Comprehensive double taxation conventions as at 1 April 2001

Country
Year/Statutory instrument number
Country
Year/Statutory instrument number
Antigua and Barbuda
1947 No.2865
Luxembourg
1968 No.1100
Argentina
1997 No.1777
Macedonia (2)
1981 No.1815
Australia
1968 No.305
Malawi
1956 No.619
Austria
1970 No.1947
Malaysia
1997 No.2987
Azerbaijan
1995 No.762
Malta
1995 No.763
Bangladesh
1980 No.708
Mauritius
1981 No.1121
Barbados
1970 No.952
Mexico
1994 No.3212
Belarus (1)(3)
1986 No.224
Mongolia
1996 No.2598
Belgium
1987 No.2053
Montserrat
1947 No.2869
Belize
1947 No.2866
Morocco
1991 No.2881
Bolivia
1995 No.2707
Myanmar (Burma)
1952 No.751
Botswana
1978 No.183
Namibia
1962 No.2352
Brunei
1950 No.1977
Netherlands
1980 No.1961
Bulgaria
1987 No.2054
New Zealand
1984 No.365
Canada
1980 No.709
Nigeria
1987 No.2057
China
1984 No.1826
Norway
2000 No.3247
Croatia (2)
1981 No.1815
Oman
1998 No.2568
Cyprus
1975 No.425
Pakistan
1987 No.2058
Czech Republic
1991 No.2876
Papua New Guinea
1991 No.2882
Denmark
1980 No.1960
Philippines
1978 No.184
Egypt
1980 No.1091
Poland
1978 No.282
Estonia
1994 No.3207
Portugal
1969 No.599
Falkland Islands
1997 No.2985
Romania
1977 No.57
Fiji
1976 No.1342
Russian Federation
1994 No.3213
Finland
1970 No.153
St Kitts and Nevis
1947 No.2872
France
1968 No.1869
Sierra Leone
1947 No.2873
Gambia
1980 No.1963
Singapore
1997 No.2988
Germany
1967 No.25
Slovak Republic (Slovakia)
1991 No.2876
Ghana
1993 No.1800
Slovenia (2)
1981 No.1815
Greece
1954 No.142
Solomon Islands
1950 No.748
Grenada
1949 No.361
South Africa
1969 No.864
Guernsey
1952 No.1215
Spain
1976 No.1919
Guyana
1992 No.3207
Sri Lanka
1980 No.713
Hungary
1978 No.1056
Sudan
1977 No.1719
Iceland
1991 No.2879
Swaziland
1969 No.380
India
1993 No.1801
Sweden
1984 No.366
Indonesia
1994 No.769
Switzerland
1978 No.1408
Ireland (Republic of)
1976 No.2151
Thailand
1981 No.1546
Isle of Man
1955 No.1205
Trinidad and Tobago
1983 No.1903
Israel
1963 No.616
Tunisia
1984 No.133
Italy
1990 No.2590
Turkey
1988 No.932
Ivory Coast (Côte d'Ivoire)
1987 No.169
Tuvalu
1950 No.750
Jamaica
1973 No.1329
Uganda
1993 No.1802
Japan
1970 No.1948
Ukraine
1993 No.1803
Jersey
1952 No.1216
United States of America
1980 No.568
Kazakhstan
1994 No.3211
Uzbekistan
1994 No.770
Kenya
1977 No.1299
Venezuela
1996 No.2599
Kiribati
1950 No.750
Vietnam
1994 No.3216
Korea (Republic of)
1996 No.3168
Yugoslavia (Federal Republic) (2)
1981 No.1815
Kuwait
1999 No.2036
Zambia
1972 No.1721
Latvia
1996 No.3167
Zimbabwe
1982 No.1842
Lesotho
1997 No.2986

NOTES

Many of the above conventions have been amended by Protocols, which are published separately with a new SI number. Any Protocol should be read in conjunction with the original convention.

(1) The UK's 1986 convention with the Soviet Union (SI 1986 No.224) is currently to be regarded as in force between the UK and the former Soviet Republic marked. The position with regard to former Soviet Republics not listed is less clear, but the UK will in all cases apply the provisions of the convention on the basis that it is still in force (until such time as new conventions take effect with particular countries).

(2) The UK's convention with Yugoslavia (SI 1981 No.1815) is to be regarded as in force between the UK and the former Yugoslav states marked. The position with regard to the remainder of what was Yugoslavia is undetermined.

(3) The 1995 convention with Belarus (SI 1995 No.2706) has not yet entered into force.

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

Algeria (Air Transport)
Belarus (Air Transport) (1)
Brazil (Shipping and Air Transport)
Cameroon (Air Transport)
China (Air Transport) (1)
Ethiopia (Air Transport)
Hong Kong (Air Transport)
Iran (Air Transport)
Jordan (Shipping and Air Transport)
Kuwait (Air Transport)
Lebanon (Shipping and Air Transport)
Saudi Arabia (Air Transport)
Zaire (Shipping and Air Transport)

NOTES

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

c) Agreements covering estates, inheritances and gifts

The following Agreements were signed after the introduction of capital transfer tax in 1975, and continue to apply to inheritance tax.

Country Year/Statutory instrument number
Republic of Ireland 1978 No.1107
South Africa 1979 No.576
USA 1979 No.1454
Netherlands 1980 No.706
(amending protocol) 1996 No.730
Sweden 1981 No.840
(amending protocol) 1989 No.986
Switzerland 1994 No.3214

Treaties with France, Italy, India and Pakistan were in place for Estate Duty before its replacement in 1975 and have different rules to eliminate to double taxation.

Revenue Prosecutions

The Inland Revenue has a policy of selective prosecution involving the most serious cases across the whole of the tax system. The Board see this as an important part of its strategy to deter tax fraud and evasion. As part of the wider publicity for this strategy, details of Revenue prosecutions are occasionally published in Tax Bulletin.

Frank Moran
Mr Frank Moran, a market trader, pleaded guilty on two counts of cheat and making false statements. Mr Moran failed to voluntarily disclose all his assets when given the opportunity by the Revenue's Special Compliance Office (SCO).

After an extensive investigation, Mr Moran, who traded at markets in North Wales and Liverpool, was arrested and admitted that for a number of years he had diverted business takings to an undisclosed bank account in Dublin and subsequently to an investment fund in the Isle of Man.

When sentencing Mr Moran at Chester Crown Court to 9 months imprisonment, Mr Justice Poole took into account Mr Moran's full co-operation during the investigation but added that these offences were so serious he felt a custodial sentence was the only appropriate one to give.

Company Boss John Foggon jailed for 2 years
John (Jim) James Foggon was sentenced to 2 years imprisonment when he appeared before Manchester Crown Court on 11 May 2001. He was also disqualified from acting as a director for 4 years.

Mr Foggon, was the chairman of Vaclensa Plc a local firm based at Worsley supplying and servicing cleaning machines.

He had pleaded guilty at an earlier hearing to defrauding the Inland Revenue over a number of years by diverting in excess of £1m of company money into a concealed bank account.

Mr Foggon controlled the bank account and used it to fund his lifestyle.

In addition to his main home in Swinton he owns a villa in Majorca and a house in the Lake District. Over the years he purchased a variety of luxury cars including a Rolls Royce, a Bentley and a Jaguar.

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

Statement of Practice

Extra-Statutory Concessions

Number

Title

Date of Issue

C32

Interest relief: companies with tax and National Insurance (NICs) liabilities under the personal service rules where the payments for relevant contracts have been received after deduction of tax by virtue of the Construction Industry Scheme (CIS) provisions.

04/04/01

A100

Tax exemption for compensation paid on bank accounts owned by holocaust victims.  

30/04/01

Statement of Practice

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

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

Content

The content of Tax Bulletin gives the views of our technical specialists on particular issues. The information published is reported because it may be of interest to tax practitioners. Publication will be six times a year, and include a cumulative index issued on an annual basis.

  • You can expect that interpretations of the law contained in the Bulletin will normally be applied in relevant cases, but this is subject to a number of qualifications.
  • Particular cases may turn on their own facts, or context, and because every possible situation cannot be covered, there may be circumstances in which the interpretation given here will not apply.
  • There may also be circumstances in which the Board would find it necessary to argue for a different interpretation in appeal proceedings.
  • The Bulletin does not replace formal Statements of Practice.
  • The Board’s view of the law may change in the future. Readers will be notified of any changes in future editions.

Nothing in this Bulletin affects a taxpayer’s right of appeal on any point.

Letters on any article appearing in Tax Bulletin should be sent to the Editor, 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 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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