Tax Bulletin Issue 9

INLAND REVENUE TAX BULLETIN 
Issue 9

CONTENTS

Market Testing: Confidentiality (Article deleted since index 2004)

Schedule E: Relocation Packages (Article deleted since index 2002)

Schedule E: Company cars (Article no longer current)

Schedule E: Vans available for private use (No longer relevant)

revenue interpretations

Capital Allowances

Inheritance Tax

Schedule D Cases I and II

Schedule D Case III

Schedule E

Interest Relief

miscellaneous

Stock Dividends

Simplified Assessing

Head Office Reorganisation (Article deleted since index 2004)

Inland Revenue Statements of Practice and Extra-Statutory Concessions

FOREWORD

The content of Tax Bulletin offers some insight into the thinking of our technical specialists on particular issues. The Bulletin does not replace formal Statements of Practice.

Publication will be four times a year, and include a cumulative index on an annual basis.

Please send any comments and suggestions, including your views on those subjects you would like to see covered, to

Miss Louise Boyle
Room 402,
22 Kingsway,
London, WC2B 6NR

We are sorry though that neither she nor our contributors will normally be able to enter into correspondence about Tax Bulletin or its contents.

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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 to

Dorothy Ridley
Room 24, New Wing,
Somerset House,
London, WC2R 1LB

You should address any enquiries about obtaining Tax Bulletin to either Tom Davis or Alan Brown at the

Inland Revenue Press Office,
6th Floor, North West Wing,
Bush House, Aldwych,
London, WC2B 4PP
Tel: 071-438 6692/6706/7327.

EDITORIAL NOTE

You will see in this issue that while retaining a technical emphasis there are a few more general pieces resulting from changes occurring both within and outside the Department. With two Budgets in a single year and the re-organisations taking place in the Civil Service generally these are interesting times. Tax Bulletin will continue to publicise those changes which may affect our dealings with practitioners and their clients.

We suggested in the last issue that the Revenue Decisions section be abandoned in favour of Revenue Interpretations. Feedback was very much in favour, with a number admitting they had never understood the difference anyway! It was pointed out though that early publication of a single decision in, for example, a new area of law, would be better than awaiting an Interpretation. The latter would tend to emerge from a series of decisions. To that end Tax Bulletin will continue to publish Decisions on an irregular basis.

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

MARKET TESTING:
CONFIDENTIALITY

There have been a number of articles in the professional press voicing concerns about the Inland Revenue's market testing programme. In particular, it has been suggested that if the Department contracts out some of its support functions there might be a drop in the high standards of confidentiality which we currently maintain. Can we put the record straight?

The main areas in which we are currently market testing are information technology (IT) support and secretarial and typing services. Within the latter, where appropriate, we are also considering some office and support services.

In relation to IT support, at the time of writing we are considering tenders from two short-listed suppliers, CSC Europe/IBM UK and EDS-Scicon Ltd. These are both highly experienced and reputed IT services suppliers. All work involving the processing and handling of confidential information will, as now, be carried out in the UK. During our evaluation of tenders we are testing the abilities of both contractors to meet our stringent requirements on confidentiality. If work is transferred we shall ensure that all necessary contractual and other safeguards are in place.

The same will apply to any secretarial and typing services which may be undertaken for the Revenue by private sector firms. We already have experience of running a substantial contract for these services with Blue Arrow Personnel Services at some of our offices in Nottingham.

Over and above the contractual safeguards are criminal sanctions. Any contractor and their employees are subject to a fine, or imprisonment, or both, for the unauthorised disclosure of information about taxpayers, in the same way as are Revenue employees.

Treasury Ministers and senior Revenue officials have emphasised the importance of confidentiality. An effective tax system relies on taxpayers' affairs being kept confidential and we continue to uphold this principle. We are taking every step to ensure that market testing in the Revenue does not jeopardise our obligations to the public in this area.

(Article deleted since index 2002)

SCHEDULE E:
RELOCATION PACKAGES

Norman Lamont announced wide-ranging reform of the tax treatment of relocation packages in his Budget Statement on 16 March 1993. The changes apply to employees starting new jobs or moving with the same job to a new location on or after 6 April 1993.

Subject to the transitional arrangements explained below, employees who are offered relocation packages by their new or existing employers, and who move jobs on or after 6 April, are entitled to a new statutory exemption from tax on removal expenses and benefits up to a maximum £8,000 in total. The Extra-Statutory Concessions A5 (removal expenses) and A67 (payments towards the additional housing cost of moving to a higher cost area) have been withdrawn, although they continue to apply in full for employees who started new jobs, or who moved with existing employers, before 6 April 1993.

TRANSITIONAL ARRANGEMENTS

The transitional arrangements allow employees who were committed to moving jobs before 6 April, and who actually took up their new positions on or before 2 August 1993 to be treated in accordance with the old concessionary regime, should they wish.

NEW STATUTORY EXEMPTION

The new exemption was introduced by Section 76 of, and Schedule 5 to, the Finance Act 1993. This inserts Sections 191A and 191B, and Schedule 11A, into ICTA 1988.

The new relief applies where the employer meets or reimburses removal expenses or provides removal benefits.

Scope of new legislation

Only qualifying removal expenses and benefits can be exempted. To be qualifying, expenses and benefits must be eligible (see next column) and satisfy certain conditions. Those conditions are:

1. the employee must change his/her main residence as a result of

- starting a new employment,
- a change of duties of employment,
- a change of location of employment.

Note that this does not require an employee to dispose of his/her former residence, merely to change main residence. What constitutes an employee's main residence is a question of fact.

2. the new main residence must be within a reasonable daily travelling distance of the new normal place of work.

3. the old residence must not be within a reasonable daily travelling distance of the new normal place of work.

The legislation does not define a "reasonable daily travelling distance." It is a matter for common sense, taking account of local conditions, and may depend on either or both travelling time or distance.

4. the expenses must be incurred, or benefits provided, before the end of the year of assessment following the one in which the employee starts the new job. It does not matter when the employee moves to his/her new home.

We have the power to extend this time limit by one or more complete tax years if it seems reasonable so to do.

Eligible expenses and benefits

Eligible expenses and benefits can be grouped into six categories:

1. disposal or intended disposal of old residence,

2. acquisition or intended acquisition of new residence,

3. transportation and storage of domestic belongings,

4. travelling and subsistence for employee and family,

5. replacement domestic goods for new property,

6. interest on bridging loans made by third parties.

The specific items which fall within each category are set out in the detailed lists of removal expenses and benefits in the new Schedule 11A.

ADDITIONAL RELIEF FOR IN-HOUSE BRIDGING LOANS

Employer-provided cheap or interest-free bridging loans will be chargeable under the usual rules for beneficial loans (Section 160 ICTA 1988). But some relief may be available if the employee, after the relevant time limit, has part of the £8,000 exemption still unused.

For instance, if an employee were reimbursed total removal expenses of £6,000, and given an interest-free bridging loan by his/her employer, there would be £2,000 of unused exemption to convert into a reduction in the charge on the bridging loan.

The new Section 191B contains the calculation used to reduce the beneficial loans charge.

PAYE ARRANGEMENTS

To help employers operate the new rules, Ministers decided that employers should not be obliged to apply PAYE to cash payments made to employees which relate to qualifying expenses paid above the £8,000 ceiling. To achieve this, Regulations amending the PAYE Regulations came into force on 12 October 1993.

To cover the period between 6 April and 11 October, we announced in a Press Release on 14 April 1993 that we would exercise our powers of care and management to achieve the same effect as the amending Regulations. This means that employers are relieved of the obligation to deduct tax under PAYE on taxable qualifying removal payments made during that period.

An employer may nevertheless find it convenient to use the PAYE system for such payments although this could only be done with the agreement of the employees concerned. This might be particularly relevant where the employer wishes to meet the employees' tax (and NI) liabilities. It may also apply where the employee wishes to pay the tax liability during the course of the year.

DISPENSATIONS

We are aware that, at the time of the Budget Statement, some employers had dispensations which included relocation expenses and benefits. In a Press Release on 14 April, we announced that, dispensations in respect of these items would be withdrawn by Inspectors with effect from 14 April. (This is because dispensations remain in force until formally revoked.) But these dispensations continue to apply to any other payments and benefits included in them. Dispensations are not appropriate for the new legislation.

REPORTING REQUIREMENTS

The amendments to the PAYE Regulations ensure that there is no need for employers to report exempt removal expenses and benefits on forms P11D or P9D.

Payments made, or benefits provided, after 14 April 1993 by employers who previously had a dispensation covering relocation expenses and benefits, to employees who fail to be treated under the old concessionary rules, need not be reported on end of year returns.

FLAT RATE ALLOWANCES

Some employers may wish to pay their employees flat rate allowances rather than reimbursing expenditure on an item by item basis. Strictly such allowances should be subject to PAYE, as they are not covered by the amendments to the PAYE Regulations. But if such allowances do no more than reimburse employees' qualifying expenses, then they may be paid gross.

They should still, of course, be reported on forms P11D or P9D at the end of the year, unless the amount paid is fully exempt under the new legislation. The larger the amounts that an employer wishes to pay as a flat rate the less likely it would be that such payments do no more than reimburse qualifying costs for the majority of employees.

GUARANTEED SELLING PRICE (GSP) AND SIMILAR SCHEMES

We have had a number of queries regarding the tax treatment of the costs associated with GSP and similar schemes provided by relocation management companies, including the treatment of compensation payments for losses on sale. We shall provide guidance on these (and other) matters in a later issue of Tax Bulletin.

[Section 76 and Schedule 5 FA 1993]

! This Article Is No Longer Current (Deleted Index 1997)

SCHEDULE E:
THE TAXATION OF COMPANY CARS
FROM 6 APRIL 1994

The Finance Act 1993 introduced a new system for taxing company cars. As from 6 April 1994 employees supplied with company cars will be taxed on 35% of the price of the car. This applies to existing cars still available after 5 April 1994 and to cars made available after that date.

PRICE

The price of a car for tax purposes will usually be the total of:

  • manufacturer's, importer's or distributor's list price of the car on the day before the date of its registration
  • taxes (VAT, and car tax if appropriate) -- but not vehicle excise duty (road tax)
  • delivery charges (including VAT)
  • list price of any accessory fitted before the car was first made available to the employee, including VAT (and car tax if appropriate), delivery and fitting charges
  • the list price of any accessory over £100 (including VAT, fitting and delivery), fitted after the car was first made available to the employee. But this only applies for accessories fitted after 31 July 1993.

Capital contributions of up to £5,000 that the employee makes towards the car and/or accessories will reduce the price of the car for tax purposes.

There are other rules for cars without a list price and for "classic cars."

TAXABLE BENEFIT

The car benefit charge is 35% of its price for tax purposes. But this will be reduced by:

  • one third -- if the employee's annual business mileage in the car is 2,500 to 17,999 miles
  • two thirds -- if the employee's annual business mileage in the car is 18,000 miles or more.

Cars which will be four or more years old at the end of the tax year will have the benefit further reduced by one third of the amount after the reduction for business mileage.

Payments by the employee for the private use of the car will continue to reduce, pound for pound, the car benefit.

Second cars

A second car will also be taxed on 35% of its price. The only reduction for mileage will be one third if the employee's annual business mileage in the second car is also 18,000 miles or more.

Classic cars

Classic cars 15 or more years old, with an open market value of more than £15,000, will be taxed on 35% of the market value, if the market value for the year is more than its list price. (The capital contribution rule also applies to classic cars as do the reductions for business mileage, age and payments for private use.)

Fuel

Where free fuel is provided for private use it will continue to be taxed, as now, on the basis of the car's engine size and whether it is petrol or diesel powered.

CHANGING PAYE CODES FOR EXISTING CARS

To help us change employees' PAYE codes for 1994-95 we are asking employers to let their Tax Office have a list of employees with company cars, showing:

  • employee's name
  • National Insurance number
  • list price of car, including delivery charges and accessories, less any capital contributions
  • amount of any payments made by the employee for private use
  • estimated mileage.

We know employers may not have records of list prices and all accessories for existing cars. In order to avoid unnecessary work, Tax Offices will accept, for existing cars only, prices based on either the list price of the car plus major accessories (automatic gearbox, air conditioning etc.), or published guides to list prices where the manufacturer's actual price list is not available. Employers should use their best efforts to find the list price of each car and its accessories, but where the information is not available they should tell their Tax Office, and provide a reasonable estimate.

Prices of existing cars may be obtained from a variety of sources including:

  • specialist lists of prices in book form or on computer disk
  • organisations offering specialist services providing prices for lists of cars
  • list prices from manufacturer's or importer's special telephone contact points
  • leasing companies, some of whom are providing advice on prices for client companies, and
  • the invoice (if shown).

CARS MADE AVAILABLE BETWEEN NOW AND 5 APRIL 1994

It would help us if employers could send their Tax Office as soon as possible employees' names, National Insurance numbers, the list prices of the cars and accessories less any capital contributions, and their expected annual business mileage bands.

CARS FIRST MADE AVAILABLE AFTER 5 APRIL 1994

Employers will be required to make quarterly returns of changes of cars (and cars newly provided) on Form P46 (car). The Form will ask for details of: car make, model, engine size (cc), and whether petrol or diesel; price of car and accessories; capital contributions by employees; and the expected annual business mileage band.

Employers will also need to complete a form P11D at the end of the tax year in the normal way to show details of all expenses payments and benefits provided for each employee.

We have published a leaflet (IR132) for employers to guide them through the new system. It is available from local tax offices.

[Section 72 and Schedule 3 FA 1993]

(No longer relevant)
SCHEDULE E:
VANS AVAILABLE FOR PRIVATE USE

Section 73 and Schedule 4 Finance Act 1993 contain new rules for taxing the benefit in kind of vans available for private use. Those rules took effect from 6 April 1993 and apply to all directors and employees within Part V Chapter II ICTA 1988 who have a van available for private use because of their employment. Private use includes travel between home and the normal place of work.

INFORMATION EMPLOYERS WILL NEED FOR REPORTING BENEFITS

We have been asked what information employers will need to have to enable them to report this benefit on form P11D by June 1994.

For each van which is not a shared van (see below) employers will need to identify:

  • the employee to whom the van is made available;
  • the age of the van by reference to the date of first registration, whether in the UK or elsewhere. (The standard charges for 1993-94 are £500 for vans under four years old at 5 April 1994 and £350 for older vans);
  • periods when the van is unavailable for private use. These occur when the van is first made available part way through the year or stops being available before the end of the year (eg when the van is bought or sold during the year, or the employee takes up or leaves the employment in the year). These periods also occur when the van is unavailable for thirty or more consecutive days (eg when the van is off the road for repairs). The standard charges are time-apportioned for any such periods;
  • contributions by the employee for private use. If the employee is required to and does pay a contribution for private use, the standard charge is reduced pound for pound.

Shared vans

There are special rules for shared vans. A van is 'shared' if it is available for the private use of more than one employee at the same time, or if it is available to different employees at different times in the year. Employers will need to identify:

  • the total number of shared vans in the year:
  • the age of each shared van (calculated as above);
  • periods before the van becomes or after it ceases to be a shared van (the standard charge is time-apportioned);
  • periods of thirty or more consecutive days when any shared van is incapable of being used at all (the standard charge is again time-apportioned);
  • periods of more than thirty consecutive days when any shared van is available for the exclusive use of one employee (the standard charge is again time-apportioned);
  • the names of the employees who actually use any of the shared vans privately in the tax year;
  • contributions which any of these employees are required to pay for the private use of any of the shared vans.

Employers will not need to keep records of which employees use which shared vans on any particular day. The standard charges (after any time-apportionment necessary) for all shared vans are added together. The total is then divided equally between the employees who used any of the shared vans privately. Employers should note that if the division produces a figure of more than £500 for any employee, the benefit for that employee is capped at £500. Similarly, the benefit is capped at £500 if an employee has a shared van and a non- shared van available at different times in the year. The figure is then reduced pound for pound by any contribution from the employee.

Employers do not need to consider the alternative charge for shared vans based on £5 a day which employees can opt for if more favourable.

[Section 73 and Schedule 4 FA 1993]

revenue interpretations

(Superseded by CA11800)

CAPITAL ALLOWANCES:
TIME WHEN EXPENDITURE IS INCURRED

Section 159(3) Capital Allowances Act (CAA) 1990 contains the basic rule for determining when expenditure is incurred for the purposes of the Act. That rule may be subject to the further rules in Section 159(4) onwards. This note does not address those further rules; it is concerned only with the basic rule in Section 159(3).

Section 159(3) CAA 1990 states that any amount of expenditure qualifying for capital allowances "is to be taken to be incurred on the date on which the obligation to pay that amount becomes unconditional (whether or not there is a later date on or before which the whole or any part of that amount is required to be paid)".

The date on which an obligation to pay becomes unconditional will depend on the terms of the particular contract for the supply of the asset concerned. The date of the contract for supply or of the issue of an invoice does not settle the point. In many cases a person buying goods is legally required to pay for them on or within a prescribed time of delivery. In such cases, we consider the obligation to pay becomes unconditional when the asset is delivered.

All Section 159(3) does is fix the date expenditure is incurred for the purposes of, for example, Section 24 (machinery or plant allowances) or Section 123 (agricultural buildings allowances). The successful claimant of allowances must, of course, satisfy the conditions for obtaining the particular allowance. In the case of machinery or plant allowance, for example, one of the conditions is that the asset on which expenditure is incurred "belongs or has belonged" to the claimant in consequence of incurring the expenditure.

[Section 159(3) CAA 1990]

INHERITANCE TAX:
GIFTS WITH RESERVATION

Under Section 102 Finance Act 1986, any property given away on or after 18 March 1986 subject to a reservation is, on the death of the donor, treated as forming part of the donor's estate immediately before his death. Gifts with reservation (GWRs) are defined as gifts where either:

  • the donee does not assume bona fide possession and enjoyment of the property at the date of the gift or 7 years before the donor's death, if later; or
  • at any time in the period ending with the donor's death and beginning 7 years before that date or, if later, from the date of gift, the property is not enjoyed to the entire exclusion or virtually to the entire exclusion of the donor.

This note provides some guidance on the Revenue's interpretation of the de minimis rule which is expressed as "virtually to the entire exclusion" and comments on the exclusion from the GWR provisions where the donor pays full consideration for any use of the property. The note also clarifies the position of the annual exemption under Section 19 IHTA 84 where a reservation of benefit ceases.

INTERPRETATION OF DE MINIMIS RULE

The word "virtually" in the de minimis rule in Section 102(1)(b) is not defined and the statute does not give any express guidance about its meaning. However, the shorter OED defines it as, amongst other things, "to all intents" and "as good as". Our interpretation of "virtually to the entire exclusion" is that it covers cases in which the benefit to the donor is insignificant in relation to the gifted property.

It is not possible to reduce this test to a single crisp proposition. Each ease turns on its own unique circumstances and the questions are likely to be ones of fact and degree. We do not operate Section 102(1)(b) in such a way that donors are unreasonably prevented from having limited access to property they have given away and a measure of flexibility is adopted in applying the test.

Some examples of situations in which we consider that Section 102(1)(b) permits limited benefit to the donor without bringing the GWR provisions into play are given below to illustrate how we apply the de minimis test:

  • a house which becomes the donee's residence but where the donor subsequently
  • stays, in the absence of the donee, for not more than 2 weeks each year, or
  • stays with the donee for less than one month each year;
  • social visits, excluding overnight stays made by a donor as a guest of the donee, to a house which he had given away. The extent of the social visits should be no greater than the visits which the donor might be expected to make to the donee's house in the absence of any gift by the donor;
  • a temporary stay for some short term purpose in a house the donor had previously given away, for example
    • while the donor convalesces after medical treatment,
    • while the donor looks after a donee convalescing after medical treatment,
    • while the donor's own home is being redecorated;
  • visits to a house for domestic reasons, for example baby- sitting by the donor for the donee's children;
  • a house together with a library of books which the donor visits less than 5 times in any year to consult or borrow a book;
  • a motor car which the donee uses to give occasional (ie. less than 3 times a month) lifts to the donor;
  • land which the donor uses to walk his dogs or for horse riding provided this does not restrict the donee's use of the land.

It follows, of course, that if the benefit to the donor is, or becomes, more significant, the GWR provisions are likely to apply. Examples of this include gifts of:

  • a house in which the donor then stays most weekends, or for a month or more each year;
  • a second home or holiday home which the donor and the donee both then use on an occasional basis;
  • a house with a library in which the donor continues to keep his own books, or which the donor uses on a regular basis, for example because it is necessary for his work;
  • a motor car which the donee uses every day to take the donor to work.

EXCLUSION OF BENEFIT WHERE FULL CONSIDERATION PAID FOR USE OF PROPERTY

The GWR provisions do not apply where an interest in land is given away and the donor pays full consideration for future use of the property (FA 1986, Schedule 20, para 6(1)(a)). While we take the view that such full consideration is required throughout the relevant period -- and therefore consider that the rent paid should be reviewed at appropriate intervals to reflect market changes -- we do recognise that there is no single value at which consideration can be fixed as "full". Rather, we accept that what constitutes full consideration in any case lies within a range of values reflecting normal valuation tolerances, and that any amount within that range can be accepted as satisfying the para 6(1)(a) test.

TERMINATION OF RESERVED BENEFITS AND THE ANNUAL EXEMPTION

Where a reservation ceases, the donor is treated by Section 102(4) Finance Act 1986 as having made a potentially exempt transfer (PET) at that time. In that event the PET will only be taxable if the donor dies within the next 7 years but the value of the PET cannot be reduced by any available annual exemption under Section 19 IHTA 1984. The Statement in paragraph 3.4 of the IHT1 booklet, which indicates that the annual exemption may apply if the reservation ceases to exist in the donor's lifetime and a PET is treated as made at that time, is incorrect. This will be corrected in IHT1 when it is next updated.

A typical outright gift to an individual of an amount exceeding the available annual exemption is partly exempt, with the balance above the available annual exemption being a PET. But a PET itself cannot qualify for the annual exemption. The reason is that a PET is a transfer which, but for the provisions of Section 3A IHTA 1984, would be an immediately chargeable transfer. By definition a chargeable transfer is a transfer of value which is not an exempt transfer: Section 2(1) IHTA 1984. So a PET cannot be an exempt transfer at the time it is made. The PET will, of course, escape a charge to IHT if the donor survives the statutory period after making it.

The annual exemption is not necessarily lost by the taxpayer. For example, suppose he makes a gift of his home in August 1991 but continues to reside there. In May 1992 he finally leaves the gifted house and the reservation ceases. In October 1992 he makes a gift into a discretionary trust (an immediately chargeable transfer). He is treated as making a PET of his residence in May 1992: the annual £ 3,000 exemption does not reduce its value. But the £ 3,000 exemption is available for setting off against the immediately chargeable transfer in October, and so is any unused exemption carried forward from the previous year.

[Section 102 FA 1986]

(Superseded by BIM35800 onwards)

SCHEDULE D CASES I AND II:
EXPENDITURE BY TRADER ON COMPUTER SOFTWARE

This article summarises our current thinking on the treatment of expenditure on computer software in the computation of taxable profits from a trade, profession or vocation.

SOFTWARE ACQUIRED UNDER LICENCE

This is the way that nearly all off-the-shelf software is acquired nowadays. The treatment of expenditure of this nature depends on the form the consideration for the licence takes.

Regular payments akin to a rental

Payments of this kind are revenue. The timing of deductions will be governed by correct accounting practice which normally requires the rentals to be spread over the useful life of the software in accordance with the fundamental accruals concept in Statement of Standard Accounting Practice No. 2. (What is correct accounting practice is ultimately a question of law but the courts are heavily influenced by current generally acceptable practice.)

Lump sum

The first question to be asked here is whether the licence is a capital asset in the trade of the licensee. In broad terms a licence is a capital asset if it has a sufficiently enduring nature. This approach has to be applied by reference to the function of the licensed software in the context of the licensee's trade. Very often the expectation will be that the software will function as a tool of the trade for a period of several years. On the other hand, the benefit to be obtained by the licensee in question may be be sufficiently transitory to stamp the payment as revenue even though the licence granted is for an indefinite period.

No simple rule of thumb covering every business situation can be successfully devised but, in any event, where software is expected to have a useful economic life of less than two years Inspectors will accept that the expenditure is revenue. In these circumstances the timing of the deduction will depend on the correct accounting treatment in the same way as it does for regular payments.

Where the licensed software functions as a capital asset of the licensee's trade capital allowances on plant and machinery will be due under Section 67A CAA 1990. This will be the case whether or not the software comes in a corporeal medium (such as on 'floppy discs') separate from the licensee's computer hardware. A short life asset election may be made where appropriate. Computer software is not defined for capital allowances purposes and therefore has its normal meaning which is wide and covers both programs and data (for example books stored in digital form).

Equipment acquired as a package

Often computer hardware and the licence to use software are purchased as a package for a single payment. In these circumstances the expenditure between hardware and software should be apportioned. Capital allowances under the ordinary plant and machinery rules will be due on the expenditure attributable to the hardware. The treatment of the balance of the expenditure, attributable to the software licence, will depend on the considerations described above. Where, however, both the hardware and software are acquired on capital account and the expenditure all goes into the general machinery and plant 'pool', apportionment will not in practice be necessary.

SOFTWARE OWNED OUTRIGHT

Most widely marketed software is licensed to users and not sold to them outright. But some, particularly larger, concerns may develop their own software. The treatment of expenditure on software acquired outright follows the same principles as those governing the treatment of licensed software. In particular, whether the expenditure concerned (including salaries of in-house computer professionals) is capital or revenue again depends on the economic function of the software in the trade in question as it does for licences acquired for lump sums.

(Article deleted since index 2002)

LOSSES SUFFERED BY BCCI DEPOSITORS

In the light of the failure of the Bank of Credit and Commerce International (BCCI) we have been asked whether tax relief will be available under Schedule D Cases I/II for the losses suffered by depositors.

The advice given is that, generally speaking, where the balance in a bank account used for the purposes of a trade, profession or vocation is lost because the bank has failed, the loss will be deductible for the purposes of computing the taxable profit or the allowable loss of that trade, profession or vocation up to a maximum of the amount normally kept in the account to meet the ordinary banking requirements of the business. Similarly, where a provision is made in respect of such a balance because it is expected to be lost, relief will be available for the provision to the extent that it reflects the reasonable expectation of loss.

The loss will also be deductible if the bank account balance was held solely to facilitate the issue of letters of credit or guarantees to trade creditors, provided that the creditors are in respect of debts incurred on revenue account by the trade, profession or vocation which suffered the loss.

In some instances it may be necessary to consider the nature and use of the account and to analyse the balance lost in order to determine the extent to which relief may be available. Moreover, each case inevitably turns on its own facts and there may be particular circumstances in some cases which mean that they do not follow the general rule above.

If, having received a Case I/II deduction, the trader receives money from the Deposit Protection Board in respect of the balance that has been lost, then that distribution would itself be a Case I receipt.

[Section 74(a) and (e) ICTA 1988]

SCHEDULE D CASE III:
MEANING OF "SOURCE" - superseded by SAIM 9090 onwards

The availability of relief under Section 353 ICTA 1988 for interest paid and the right (or obligation) to deduct tax from that interest under Section 349 ICTA 1988 may depend on whether interest is annual interest chargeable to tax under Case III of Schedule D. Chargeability in turn depends on there being a UK source. The current Revenue view on the location of the source for interest is based on the case of Westminster Bank Executor and Trustee Company (Channel Islands) Limited v National Bank of Greece SA (46 TC 472) -- the Greek Bank case. The factors considered relevant in that case (leading to the conclusion that the income involved did not have a UK source) were

  • there was an obligation undertaken by a principal debtor which was a foreign corporation
  • the obligation was guaranteed by another foreign corporation with no place of business in the UK
  • the obligation was secured on lands and public revenues outside the UK
  • funds for payments by the principal debtor of principal or interest to residents outside Greece would have been provided either by a remittance from Greece or funds remitted by debtors from abroad (even though a cheque might be drawn in London).

Although the Greek Bank case was concerned with income which turned out not to have a UK source, inferences can be drawn from that case about the factors which would support the existence of a UK source and we regard the most important as

  • the residence of the debtor, ie the place in which the debt will be enforced
  • the source from which interest is paid
  • where the interest is paid, and
  • the nature and location of the security for the debt.

If all of these are located in the UK then it is likely that the interest will have a UK source.

It is not possible for us to comment individually in advance on the many cases in which the location of the source of interest may be relevant since the precise tax treatment depends on all the factors and on exactly how the transactions are in fact carried out. We hope that this summary of our views will assist practitioners and their clients in determining for themselves where the source of interest with which they may be concerned is located.

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

DEEP DISCOUNT SECURITIES
ISSUED IN A FOREIGN CURRENCY

A Deep Discount Security has to satisfy the rules in Schedule 4 ICTA 1988 in order to benefit from those provisions. In particular there must be a difference between issue price and redemption value of 15% or more of the redemption value or 0.5% of that value for each year of the term of the security. These rules are in paragraph 1(1)(e) of Schedule 4.

A number of people have asked how these rules should apply where a security is issued in a currency other than sterling. Their concern is that in sterling terms the certainty of yield to redemption otherwise required by Schedule 4 would not be met if the necessary computations had to be carried out in sterling. If there was uncertainty of yield then the securities would become Deep Gain Securities subject to the less favourable rules in Schedule 11 Finance Act 1989.

The Inland Revenue's view is that the test to decide whether a discount is "Deep" may be carried out in the currency of issue. If, for example, a security is issued in dollars and the provisions in Schedule 4 are otherwise satisfied then the fact that it is not possible to calculate in sterling with any certainty either the discount or the yield to redemption will not disqualify the security and will not of itself turn it into a Deep Gain Security.

(Article deleted since index 2002)

DEEP DISCOUNT SECURITIES
WITH LESS THAN 12 MONTHS MATURITY

We have been asked whether a security carrying a discount of 15% or less but with a maturity of less than 1 year can be a Deep Discount Security under the rules in Schedule 4 ICTA 1988.

The potential problem is that where a discount is 15% or less the security can only qualify where the discount exceeds 0.5 of Y% of the amount payable on maturity where Y is the number of complete years between the date of issue of the security and the redemption date (paragraph 1(1)(c)(ii) of Schedule 4). If the security has a maturity of less than 12 months then there are no complete years.

The Inland Revenue view is that where a security has a maturity of less than 12 months a proportionate part of the complete year will be adopted for the purposes of the formula in paragraph 1(1)(c)(ii) of Schedule 4. Thus where a security is issued for 6 months Y would equal 0.5 and consequently any discount exceeding 0.25% would be deep. The adoption of any other interpretation would mean that "Y" in the formula would be zero and this would give peculiar results not intended by the legislation.

SCHEDULE E:
TERMINATION PAYMENTS AND LEGAL COSTS

We have been asked about the tax treatment of legal costs incurred by an employee in a Court action to recover compensation for loss of employment. On 2 September 1993 we issued a Press Release publicising an Extra-Statutory Concession relating to such costs. Copies of the Press Release are available from the Inland Revenue Press Office, North West Wing, Bush House, Aldwych, London WC2B 4PP.

Section 148 ICTA 1988 charges tax under Schedule E on payments made directly or indirectly in connection with the termination of the holding of an office or employment. That charge is subject only to the very specific exemptions and reliefs which are contained in Section 188 of the Act.

Section 188 does not, for example, allow any deduction for legal costs which the former employee or office holder may incur in pursuing the former employer for wrongful dismissal even though any compensation which may be recovered is taxable under Section 148 (see Warnett v. Jones 53 TC 283).

In taking action to recover compensation for loss of an office or employment an individual may succeed in recovering from the former employer some or all of the costs incurred. This might be because he or she is successful in a Court action against the former employer or because a settlement is reached which provides that costs be reimbursed. Any payment made by way of recovery of costs would, in our view, be assessable to tax under Section 148 in addition to the compensation which the former employer agreed or was obliged to pay. The effect of this is that the individual could have a liability to tax on a payment for legal costs even though the actual expense incurred is not tax-deductible.

However we are prepared -- in certain circumstances -- not to charge tax under Section 148 on payments of costs made to (or to the order of) the former employee or office holder.

In cases where the dispute is settled without recourse to the Courts no charge will be imposed on payments made by the former employer --

  • direct to the former employee's solicitor and
  • in full or partial discharge of the solicitor's bill of costs incurred by the employee only in connection with the termination of his or her employment and
  • under a specific term in the settlement agreement providing for that payment.

In cases where the dispute goes to Court no charge will be imposed on payments of costs made by the former employer, even where these are made direct to the employee, in accordance with a Court Order (whether this is made following judgement or compromise of the action).

Our approach applies only to legal costs. It does not apply to other professional costs, eg accountancy fees, nor to legal costs incurred over and above the amount which the former employer may pay in the circumstances mentioned. Inspectors may ask to see documentary evidence in support of a claim that a payment by a former employer meets the necessary requirements as outlined above.

[Sections 148 and 188 ICTA 1988]

(Superceded by IM3804 onwards)

INTEREST RELIEF:
SECTION 360 ICTA 1988 --
MEANING OF "ACTUAL MANAGEMENT
AND CONDUCT OF THE BUSINESS"

Section 360 ICTA 1988 describes the conditions which have to be satisfied for an individual to obtain relief for interest on a loan to acquire an interest in a close company. One of the conditions is that the individual either has a material interest in the company or holds ordinary share capital of the company and works for the greater part of his time in the actual management or conduct of the company or of an associated company (Section 360(2) and (3)).

Questions sometimes arise as to how the phrase "actual management or conduct" is to be interpreted. Individuals will normally be regarded as meeting this requirement if they are directors or have significant managerial or technical responsibilities. Because the statute refers to "actual management or conduct of the company" the individual must be involved in the overall running and policy-making of the company as a whole. Managerial or technical responsibility for just one particular area will not be sufficient.

Whether an individual does satisfy the "actual management or conduct" test is a question which can only be answered by consideration of the full facts of the particular case.

miscellaneous

(Superceded by CT 1704)
STOCK DIVIDENDS: SECTION 249 ICTA 1988 - INFORMATION AVAILABLE TO SHAREHOLDERS

A company may offer its shareholders an option to take additional shares rather than a cash dividend, in circumstances where Section 249 ICTA 1988 will apply. Such scrip issues are described as stock dividends in the statute.

Where individuals, personal representatives or trustees (shareholders within Section 249(4)(5) or (6)) take up such an option, they are treated as having received on the due date of issue income of an amount which, if reduced by an amount equivalent to Income Tax on that income at the basic/lower rate for the year of assessment in which the due date of issue fell, would be equal to "the appropriate amount in cash". The latter is defined as being either

  • the relevant cash dividend or, if substantially greater or less,
  • the market value of that share capital on the date of first dealing or, in the case of an unquoted company, the due date of issue.

"Substantially" in this context means a difference of 15% or more (Statement of Practice A8).

Shareholders and their professional advisers will need the correct figure for "the appropriate amount in cash" in order to complete their tax returns.

A company issuing such shares is required to make a return to the Inspector within 30 days from the end of the return period as defined in Section 250 ICTA 1988 and should include the appropriate amount in cash. It is however under no statutory obligation to advise the shareholders. Many companies will nevertheless do so. If exceptionally the company does not, and the information is not forth- coming even after an approach, there is no objection to assistance being sought from the Inspector. It will only be the Inspector dealing with the company who is likely to have the figure to hand, but, if it is not known which Inspector this is, an approach should be made to the Inspector dealing with the taxpayer's affairs.

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

SIMPLIFIED ASSESSING

Since the last Budget statement when the Government announced its intention to introduce legislation in the 1994 Finance Bill practitioners have asked us how best to prepare their clients for the new system. As this edition of Tax Bulletin is being published before the Budget, discussion of the legislation must be left for subsequent issues. But it is already clear that the benefits to be derived from the new system will be most tangible for taxpayers whose affairs are up to date.

The combination of a "current year" basis of assessment and a returns submission cycle that will operate more consistently than now means that submission of returns and, particularly, accounts will be expected more regularly and generally earlier than is often the case at present.

This will be partially frustrated where there is a backlog of old system returns and accounts which have not been submitted on time. While there will generally be an opportunity to bring two years' accounts together for the year of transition from the "preceding year" to the "current year" basis of assessment, more may need to be done by those whose affairs are more seriously in arrear. So we suggest it would be to the advantage of taxpayers and their advisers, as well as ourselves, if inroads were made into these arrears at an early stage.

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

HEAD OFFICE REORGANISATION

On 19 August 1993 the Board of Inland Revenue decided to reorganise Head Office and replace the two directorates of operations (DO1 and DO2) and the Change Management Group with three new divisions:

  • Quality Development Division
  • Business Operations Division
  • Change Management Division

THE MAIN RESPONSIBILITIES OF THE NEW DIVISIONS ARE:

Quality Development Division

Leading the quality development programme for the whole Department covering all aspects of the work we do. In particular, developing an overall strategy for a substantial, continuing and lasting quality improvement and strategies for compliance, customer service and the Citizens' Charter.

Business Operations Division

Dealing with the operational Executive Offices by agreeing and monitoring operating plans and targets, advising on operational implications of policy changes and giving guidance to the Executive Offices including day to day instructions and procedures where needed.

Change Management Division

Leading the work on the Department's Change Programme, on business strategy and on project management. In particular the Division will manage the major reviews and projects including Simplified Assessing.

As part of this internal restructuring Central Division has passed its quality and customer service related function to the Quality Development Division and has been renamed Central Support Division. It retains its functions in relation to policy co- ordination and support for the Board, being responsible in particular for Next Steps, deregulation, Budget and Finance Bill processing and developing and over-seeing the Department's planning system.

INLAND REVENUE STATEMENTS OF PRACTICE AND
EXTRA-STATUTORY CONCESSIONS ISSUED BETWEEN
1 AUGUST 1993 AND 31 OCTOBER 1993

STATEMENTS OF PRACTICE

Number   Title                             Date of Issue 
9/93      Corporation Tax Pay and File:          8/10/93
Corporation Tax Returns
10/93     Corporation Tax Pay and File:          8/10/93
Special arrangements for
Groups of Companies
11/93     Corporation Tax Pay and File:          8/10/93
Claims to Capital Allowances
and Group Relief Made
Outside the Normal Time Limit
(For 12/93, see Issue 8 of Tax Bulletin)
13/93     Capital Gains Tax:                     17/9/93
Compulsory Acquisition of
Freehold by Tenant

EXTRA-STATUTORY CONCESSIONS

Number   Title                             Date of Issue
C21       Life Insurance Companies:              21/7/93
Levies Under the LAUTRO                (revision)
(Compensation Schemes)
Rules 1993
D20       Capital Gains Tax:                     18/8/93
Residence Occupied by                  (revision)
Dependent Relative
A81       Termination Payments                   2/9/93
and Legal Costs
A11       Residence in the UK:                   14/9/93
Year of Commencement (revision)
or Cessation
A78       Residence in the UK:                   14/9/93
Accompanying Spouse                    (revision)
A82       Repayment Supplement                   27/9/93
to Individuals Resident
in EC Member States

You can get copies of SPs and ESCs from Christine Jordan at the Public Enquiry Room, Somerset House. Telephone 071-438 7772

The information published in Tax Bulletin is reported because it may be of interest to tax practitioners. 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.
  • "Revenue decisions" report conclusions that were reached on the facts of individual cases, but do not necessarily include all the detailed facts which may have been relevant to the decision. They provide an indication of the approach the Revenue has adopted in the past, but have not been drafted as generally applicable statements of the Revenue's position. It cannot be assumed therefore, that interpretations of the law contained or implicit in these decisions will necessarily be applied in other cases.
  • 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.

Subscribers to our news release mailing list automatically receive copies of Tax Bulletin.

To find out more, contact:

Tom Davis or Alan Brown, Inland Revenue Press Office, 6th Floor, North West Wing, Bush House, Aldwych, London WC2B 4PP. Telephone: 071-438 6692/6706/7327.

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