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A new double tax treaty with the United States of America was formally signed on 24 July 2001 and has been widely welcomed. One of the main features is the introduction of a zero withholding tax on dividends paid on 80 per cent shareholdings and also those paid to pension funds. Previously, British pension funds have suffered 15 per cent withholding tax and so the new zero level will be a major benefit for them.
A new double tax treaty with the United States of America was formally signed on 24 July 2001 and has been widely welcomed. One of the main features is the introduction of a zero withholding tax on dividends paid on 80 per cent shareholdings and also those paid to pension funds. Previously, British pension funds have suffered 15 per cent withholding tax and so the new zero level will be a major benefit for them. Likewise, United States subsidiaries of United Kingdom companies have previously suffered five per cent withholding tax on dividends and will now benefit from the effective abolition of this withholding tax.
Another major improvement in the new treaty is that it is updated in relation to capital gains to include the normal treaty provision for capital gains to be taxed only in the country of the owner's residence, except in relation to real property. Under the old treaty, capital gains were to be taxed in accordance with the provisions of the domestic law of each country.
New tax credit system
In the 2000 Budget, it was announced that two new tax credit systems would be introduced for families with children and for low income working households starting in 2003.
On 19 July 2001 the Inland Revenue issued a consultation document setting out an outline of the proposed new system and comments are invited by 12 October 2001. E-mail Sandra.Bevan@ir.gsi.gov.uk
The full consultation document can be accessed on the Revenue's website. The new credits will broadly replace the various existing tax credits, introduced comparatively recently such as the working families tax credit and the children's tax credit. A new integrated child credit is proposed, designed to provide a continuing stream of income for families with children, irrespective of whether the adults in the family are in work. It will pay support for children to the main carer and will be assessed on the basis of household income. The proposal is that it will be payable until the beginning of September following a child's sixteenth birthday.
The working families tax credit and disabled persons tax credit is to be replaced by an employment tax credit. This will basically be a non-taxable supplement to employment or self-employment income, paid by the Government. It is proposed to retain the basic working hours requirement of at least 16 hours a week with an additional payment for those working at least 30 hours a week. At present, it is not anticipated that the credit will be payable to those aged 25 and over, if they are without children or disability. The new credit will also incorporate the current Government benefit available to those aged 50 or over who return to work after six months unemployment.
The credit will be principally paid by an employer as a supplement to wages and will run on an annual cycle so that the employer will continue to make payments at the existing rate throughout the year until notified by the Revenue of a new rate to be applied. At present funding to meet tax credits can be applied for by employers and the Revenue is looking at the possibility of automatically increasing the amounts of funding when a new employee becomes entitled to employment tax credit.
The entitlement to the credits will be based, not on employment or self-employment income alone, but on total annual income as declared for tax purposes with the addition of social security benefits. For the self employed, the figure is likely to be based on the most recent accounting period for which a self assessment has been made but the proprietor of a profitable business will be prevented from claiming the new credit if for some reason the actual amount of profit liable to tax is reduced to a very low level for one year, as there will be an end of year adjustment by reference to the then current level of income. As all taxable income is taken into account in assessing the amount of credit due, the proposal is that the current requirement for working families tax credit, that the claimant's capital does not exceed £8,000, would be abolished; this would appear to offer a selling opportunity to those offering non-income producing assets, such as single premium bonds. The credit will be primarily paid by the employer, where the recipient is in employment, but in other circumstances it may be paid direct by the Government but in that event there will be a requirement that a bank account is opened by the claimant.
Corporate tax reforms
The Revenue has issued a consultation document, accessible on its website, entitled 'large business taxation, the Government's strategy and corporate tax reforms'.
After a considerable amount of political material, this document examines a possible capital gains tax exemption for companies selling substantial (that is a 20 per cent interest or more) shareholdings in trading companies or trading groups; the tax treatment of foreign dividends and the future of double taxation relief for companies is also discussed; and there are also more thoughts on a possible deferral relief for gains on substantial shareholdings.
The possible exemption for corporate sales of shareholdings is proposed for trading companies or members of trading groups which dispose of shares in another trading company or group and where at least 20 per cent of the investee company's ordinary share capital has been held for a 12-month period ending within the twelve months prior to the disposal. The exemption would apply to disposals of shares of any class in the company in question but not to securities.
The possibility of an exemption for foreign dividends is also mooted in the document. The final possibility discussed is an extension of capital gains rollover relief for corporate investors. This is broadly the idea which has already been subject to two rounds of consultation, and is an alternative to the capital gains tax exemption also discussed in the document. Briefly, the possible idea is that where a company disposes of all or part of a 20 per cent shareholding in another company and reinvests the proceeds in a four-year period (twelve months before and three years after the relevant disposal) in another such company, a form of rollover relief could be claimed.
Responses to the consultation should be submitted before the beginning of October next.
