Am I bovvered?

MIKE TRUMAN introduces our initial coverage of the PBR, with comments from FRANCESCA LAGERBERG, KEITH GORDON  and RICHARD CURTIS, and an alternative view from MARK LEE.

CHANCELLOR, YOU ANNOUNCED that you were “simplifying” corporation tax for small companies by replacing the starting rate of 0% and the non-corporate distribution rate with “a new single banding set at the current small companies' rate of 19%”. This appears to be a long-winded way of saying that you were wrong to introduce the 0% rate at all, wrong to try and patch it up with the non-corporate distribution rate, and that you are going back to where we were before this all started.'
'Am I bovvered? Am I bovvered though?'
'Well you should be bothered. Kevin Nicholson from PricewaterhouseCoopers says “All small companies which previously reinvested some of their profits will pay more tax and as a consequence will have less profit to reinvest in the business,” and that businesses need consistency in the tax system in order to plan.'
'But am I bovvered though? Does my face look bovvered?'
'Well what about pensions? You let everyone work on the basis that after A-Day pension funds would be able to buy residential property, and then suddenly you slam the door shut. Have you any idea how much time has been wasted setting up systems to cope with property purchases which will now have to be junked? And what about the people who bought off-plan, who now have to dispose of a half-built house or flat before A-Day?'
'I ain't bovvered though.'
'What about the disclosure of tax avoidance then? No sooner has the profession got used to the current system than you propose to extend it to all of income tax, corporation tax and capital gains tax. And you say you are going to change the filters, but you don't explain how. Or what about in-house schemes, suddenly finding that they have to report within 30 days when the existing system lets them wait until the tax return filing date. Richard Collier-Keywood, UK head of tax at PricewaterhouseCoopers, says that this is a significant change for in-house schemes, and that unless the filters are carefully worded we could be back to the “needle in a haystack syndrome, where HMRC is overwhelmed with disclosures of perfectly legitimate tax planning.”'
'But am I bovvered? Does my face look bovvered?'
'Then there's tax credits. Time after time you have said what a success they are, but now you have to raise the income disregard ten-fold to £25,000 in order to deal with the problem of contributions being clawed back. On the other hand Dawn Primarolo is proposing that from April 2007 payments will be adjusted in-year to reflect estimated changes in income that are reported by claimants, and that the time limit for reporting changes will reduce from three months to one. How are we supposed to understand the logic of the system after these changes when you hide bits of them in different statements?'
'But I ain't bovvered though. Am I bovvered? Do — I — look — bovvered?
'Well since you ask, Chancellor, yes you do. You look like a school … boy, caught with a catapult in his hand in front of a broken window, claiming that “a big boy did it, then ran away”. As an editor, I suppose I shouldn't be bovvered — I'm sorry, bothered - because you have enabled me to fill the magazine with articles about the non-corporate distribution rate and buying property in SIPPs, and now I can fill it again with articles about abandoning the non-corporate distribution rate and getting money back out of SIPPs. But if I was you, I wouldn't just be bothered. I'd be embarrassed.'
Mike Truman (with apologies to Catherine Tate)

Small business measures

By Francesca Lagerberg, Smith & Williamson
Who can forget Dawn Primarolo, the Paymaster General, telling the House of Commons that a small business would be looking a gift horse in the mouth if it did not incorporate. A short time afterwards we were told that incorporation was not such a 'good thing' and was in fact 'unacceptable tax avoidance', thus ushering in the non-corporate distribution rate (NCDR). This legislation has proved to be complex in practice and for many small companies was a compliance and financial burden. There was considerable confusion over the operation of the NCDR and only a few weeks ago HMRC produced yet more examples to try and explain how the rules operated. There will be few therefore who will regret the Pre-Budget Report announcement of the demise of the NCDR and the rational acceptance by the Government that removing the nil rate starting band was the only logical solution to a tax problem it had created.
Since 1 April 2000 there has been a starting rate of corporation tax for companies with profits of £10,000 or less. This began as 10% but was reduced to nil for the year to 31 March 2003. Marginal relief was introduced for companies with profits between £10,000 and £50,000 per year. Above that level profits were taxed at 19% (the 'small companies rate').
Many small businesses chose to incorporate to take advantage of both the nil rate starting band and, of course, the ability to extract funds in the form of an NIC-saving dividend. The Government then acted to stem the flow of incorporations and in FA 2004 introduced the NCDR. This sought to impose a 19% charge on all distributions made from companies where the underlying rate was less than 19%, i.e. it affected companies with profits of less than £50,000.
The PBR has announced that, probably with effect from 6 April 2006, it will remove both the zero starting rate of corporation tax and thus remove the need for a NCDR. Instead there will be a single banding set at the small companies rate of 19%.
For many this is welcome simplification, but it could mean a tax increase for some small businesses depending on how they extract funds. For example, it will mean an increase for a company which does not distribute profits and has profits under £10,000, as it will not currently be paying anything under the NCDR.

Small business capital allowances

Due to the removal of the nil rate starting band for corporation tax, the Government is to re-introduce the 50% first year capital allowances for small businesses. This was available for one year only from April 2004 and was not renewed in the March 2005 Budget. However, it will now be reintroduced for the year from April 2006.

Other deregulatory measures — Form 42

At the March 2005 Budget a paper was released entitled 'Working Towards a Better Relationship' which sought to ask what were the real issues concerning small businesses. The responses have now been published plus a report on ways of reducing administrative costs. This was released just before the PBR by HMRC and can be found in full in the 'What's new' section of the HMRC website at www.hmrc.gov.uk, dated 28 November 2005. The new paper is called 'Making the new relationship a reality' but, putting aside the fact that it all sounds like marriage guidance counselling, the big win is the recognition that the existing regime for having to complete Form 42 was wasting everyone a lot of time.
Form 42 is the form on which employers report annually their transactions in employment-related securities, mainly shares and share options. Small businesses had estimated the cost for completing each form was up to £200 to report the first issue of shares. HMRC have accepted that it can reduce the numbers of forms required quite dramatically (by an estimated 90%!). However, as commentators have pointed out you do still need to wade through some paperwork to determine that you do not need to fill in a form (see www.hmrc.gov.uk/shareschemes/form42.htm).
The HMRC guidance says that the events that no longer need to be reported from the 6 April 2005 are:

• the acquisition of most founder shares;
• the acquisition by directors of further shares through a rights or capitalisation issue where the further shares would be available to all shareholders on the same terms;
• shares acquired by directors under reinvestment of dividends arrangements (SCRIP or DRIP); and
• residents' acquisition of shares in flat management companies.

Personal capital taxes

By Keith M Gordon MA (Oxon) ACA CTA Barrister
The impact of the PBR with regard to capital taxes seems to be a case of square pegs and round holes.

Change to pre-owned asset rules

The tax charge on so-called pre-owned assets was always going to be a disaster — for taxpayers, their advisers and the Revenue authorities. The fundamental problem is that inheritance tax seeks to impose a tax charge on the occurrence of certain events — principally death — whereas the income tax charge on pre-owned assets focuses on the continuing 'availability' of an asset for an individual's use. Furthermore, in many cases, the pre-owned assets legislation applies to arrangements entered into several years ago (for a variety of reasons) where it is not practicable (or, in some cases, possible) to escape the scope of the rules without incurring a double tax charge.
When the FA 2004 provisions were drafted, they explicitly exempted from charge situations in which the asset in question was included in the taxpayer's estate or where the estate included property deriving its value from the asset in question and where this value was not substantially less than the value of the underlying asset (see FA 2004, Sch 15 para 11(1)).
This meant that when assessing whether there was a charge under Sch 15, one needed only to look at whether the offending asset formed part of an individual's estate (as defined in IHTA 1984, s 5(1)). This in turn meant that certain arrangements could avoid a Sch 15 charge and still escape inheritance tax. This is because IHTA 1984, ss 53 and 54 specifically exclude from the charge to inheritance tax situations where an individual has an interest in possession in property and that interest reverts to the settlor at the end of the interest in possession. In those cases, there would be no income tax charge because, throughout the interest in possession, the property is treated as forming part of the life tenant's estate (IHTA 1984, ss 5 and 49).
It is not clear whether this effect was by design or by oversight. However, it is now being branded as 'unacceptable' and such arrangements will cease to be exempt from the pre-owned asset charge with effect from 5 December 2005. Of course, (not that it will be much consolation) taxpayers newly brought within the pre-owned assets charge by this change can instead opt into an inheritance tax charge by making an election by 31 January 2007 (or such later date as might be permitted by regulation).

Inheritance tax scheme blocked

A more obvious scheme to avoid inheritance tax has been blocked with effect for transactions on or after 5 December 2005. Under IHTA 1984, s 48(3), overseas property subject to a trust (with a non-domiciled settlor) is excluded property and therefore escapes a charge on the beneficial owner's death. It was therefore possible for deathbed planning to take place by exchanging one's chargeable estate for an interest in a settlement containing offshore property where the settlor was not domiciled in the UK. Section 48(3) will cease to apply in cases where an interest in a trust is purchased on or after 5 December 2005.

Disclosure rules extended

The disclosure rules will be extended from April 2006 to all capital gains tax arrangements and not just those dealing with employment matters or involving financial products. However, there is not, as yet, any proposal to bring inheritance tax schemes within the scope of the disclosure rules.

Capital redemption policies

Finally, the rules in TCGA 1992, s 204 are to be revised to legislate the HMRC view that gains arising on capital redemption policies are exempt from capital gains tax. This was certainly the case in 1965 when the capital gains tax rules were introduced, but it is arguable that a change in 1975 removed this exemption. Whilst it is unusual for HMRC to argue that a particular asset is exempt and a taxpayer to argue that an asset is chargeable, there have been capital gains tax planning schemes which have created losses under such policies. Such losses are allowable for capital gains tax purposes if the policies are not themselves exempt assets. The revised s 204 will apply in respect of disposals made on or after 5 December 2005.

Planning gain supplement

By Richard Curtis
The widely flagged 'planning gain supplement' (PGS) finally appeared as part of the government's package of measures to increase social housing and speed up the supply of new homes. The PGS will tax the 'windfall profits' of landowners who sell land for residential development and the aim is for this is to be introduced in 2008 following consultation.
The consultation document, 'Planning-gain Supplement: A consultation' is published on the Treasury website (www.hm-treasury.gov.uk/media/F59/D3/pbr05_planninggain_449.pdf) and the closing date for responses is Monday, 27 February 2006. The document explains that 'to help finance … vital infrastructure and support growing communities … the Government should capture a portion of the land value uplift arising from the planning process'.
The Barker Review proposed that the granting of planning permission would be contingent on the payment of PGS and the basis for PGS would be the 'planning gain', i.e. the difference between the 'CUV' or current use value and the 'PV' — planning value. The rate of the PGS — which has yet to be decided, but the Government describes this as 'modest' — will be applied to the difference between CUV and PV. The Government quotes uplifts of values from £9,287 per hectare for mixed agricultural land to £2,460,000 for residential use. The consultation document seems to imply that, rather than average valuations being used, actual valuations will be fairer.
Although calculated by reference to the increase in value from planning permission being granted, the PGS would not be payable until the development of the site actually commenced, by which time financing (which would thus have to include a provision for the levy) should be in place. The developer — 'the chargeable person' — would then declare his intention to commence development of the site, which would be a statutory chargeable event indicated by the issue of a 'development start notice', without which development could not lawfully proceed. A self-assessed PGS return would then have to be submitted to HMRC within a certain period, together with relevant supporting information and payment. A 'development stop notice' could be issued in cases of non-compliance.
For those worried about their new conservatory or house extension, the Government proposes that home improvements should be excluded from the levy and is also considering whether a lower rate should apply to urban 'brownfield' sites than to rural 'greenfield' developments, with the possibility of thresholds to exclude the smaller developments.
The more cynical readers will note a new word in the lexicon of taxation, 'capture'. This seems to imply that there are sums of money running around development sites that can be caught and put in the government's pocket without affecting the price of property. The consultation document thinks that the PGS cost will be passed back to the landowner 'through lower prices bid for land' and the regulatory impact assessment suggests that because new houses only account for 10% of housing transactions, the cost of houses is unlikely to increase. We shall see; as my surveyor brother- in-law never tires of pointing out, 'the great thing about land is that they are not making it anymore'!

Nighty night

Meanwhile, in a parallel universe untroubled by publishing deadlines, MARK LEE views the 'flipside' of the Pre-Budget Report.

Were you up late on Monday, trying to produce an overnight summary of the Chancellor's PBR announcement? My sympathies if you were; especially if you were wondering whether or not it was worth the effort.
Why does anyone still attempt to compete with the daily newspapers? Who is really interested in instant analyses other than the 'financial' journalists with copy to fill? Does anyone really think that their clients and contacts can tell the difference between one instant analysis and another?
When I first started working in tax nearly 25 years ago there was only one annual Budget statement and it was always in March. It regularly contained announcements that would take effect within the following two to three weeks at the start of the next tax year on 6 April. In those 'good old days' there was some logic in trying to produce an instant analysis of the Budget announcements. Clients wanted to know what they needed to do or to consider before the imminent end of the tax year.
The other reason for an instant analysis was to enable the papers to produce their little graphics showing how the Budget would impact a range of sample voters — the single mum, the retired couple, etc. Nowadays the relevant information for these little graphics is:

(a) partly announced in the PBR and partly in the Budget; and
(b) so complicated that numerous assumptions are required thus negating any real value in the comparisons in any event.

I think that the papers are slowly waking up to this fact. It is an inevitable consequence of the complexities of our tax system as it affects the person in the street.
In my experience, clients have long been far more interested in considered analysis and this is rarely possible overnight. Indeed, the often vague nature of the press releases that are issued immediately after the Chancellor of the Exchequer sits down these days means that much overnight analysis often turns out to be either banal, incorrect or pure speculation.
Even putting all that to one side, there is still the question as to what topics should be covered by the Budget summary? Should these be limited to matters addressed by the Budget statement and press releases? Should the more obscure items be included or excluded? Would there not be more value for the reader of your Budget summary if you also addressed other recent and imminent key tax developments and changes? Let us not forget that many such changes take effect a year or so after they are originally announced.
Personally, I am far more interested in providing my clients and contacts with valuable updates that are tailored and relevant. That means I need not stay up all Monday night to produce an instant summary of the PBR. Indeed I'm planning instead to be at a reception celebrating the 75th anniversary of CIOT. I hope I won't be lonely!

Issue: 4037 / Categories: Comment & Analysis