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Offshore income gains
HMRC have confirmed that changes will be introduced in Finance Bill 2007 relating to investment trust companies investing in certain offshore funds. As part of their portfolio, an investment trust company can hold investments in collective investment schemes resident outside the UK. If the offshore fund is not certified by HMRC as 'distributing', the gains on sale of shares or units in that fund are referred to as 'offshore income gains', which are included in the taxable income of the company.
Until 2005, the prevailing practice was to treat these gains as part of the eligible income of an investment trust company. As part of work on the reform of taxation of UK investors in offshore funds, HMRC realised that this was incorrect and a change of interpretation was published in Tax Bulletin 79 (October 2005). While this could potentially have adversely affected some companies, HMRC and industry have worked together to find a solution that will prevent this from happening. The change of interpretation was originally introduced for accounting periods beginning on or after 1 January 2006, but following discussions with industry around the time needed to adjust their operations, this has been delayed.
The legislation in Finance Bill 2007 will provide certainty to such companies that offshore income gains will not impact on their status as approved investment trust companies.
www.hmrc.gov.uk
SDLT returns
Since the introduction of 2D barcoded SDLT returns, HMRC have been manually keying forms that fail to scan, to avoid delays in sending out certificates. But the numbers of 2D barcode scanning failures are growing, with approximately 3,000 to 4,000 each month now manually keyed.
From 1 June 2007 HMRC will start sending incomplete or incorrect returns back to practitioners, where possible, explaining why the form did not scan. A replacement form will then need to be re-submitted.
So that practitioners are prepared for the change in approach, which has been agreed in consultation with the Law Society and other representative bodies, HMRC will send a letter to those for whom they key a return, explaining that the service will be withdrawn from 1 June. This began on 19 March 2007.
If practitioners fail to send a replacement return back within the 30 day time limit, their client will be liable for a penalty. To avoid that happening, HMRC undertake to return the incorrectly completed form immediately, and to warn the practitioner of this possibility.
HMRC appreciate that this will cause some practitioners more work in the short term. However, it will give them the opportunity to explain to agents, who at present are largely unaware that their forms are failing to scan, where the problems lie. HMRC remind practitioners that the more efficient alternative to using 2D barcoded forms is to file land transaction returns online. The SDLT 5 certificate is delivered electronically, shortly after successful transmission and can be printed off and submitted to the appropriate Land Registry (with the necessary documents) for registration. See www.hmrc.gov.uk/so/online/.
www.hmrc.gov.uk
Payments
When contacting HMRC for further information about self assessment payments, they ask that the following information about the relevant taxpayer is provided: name, address, telephone number, ten digit reference number (or the name of the taxpayer's local HMRC office).
It is important to provide the address and telephone number, as they normally respond to enquiries by either telephone or letter.
The telephone number for Accounts Office Shipley is 01274 539328 and for Accounts Office Cumbernauld, 01236 783631.
www.hmrc.gov.uk
Disregard regulations
Companies which have adopted fair value accounting under Financial Reporting Standard 26 or International Accounting Standard 39 in respect of their financial instruments may hold currency, commodity or debt derivatives that have been designated as hedging instruments in cash flow hedges of forecast transactions. Such companies should be aware of a new corporation tax election under regulation 6(3A) of the Disregard Regulations (SI 2004/3256). The deadline for making the election to HMRC is, for many companies, 31 March 2007. HMRC have published a Revenue & Customs Brief to provide guidance for companies that may be considering whether or not to make such an election.
The Disregard Regulations, which have effect for periods of account beginning on or after 1 January 2005, were in part intended to help companies reduce the volatility in taxable profits that may result from hedging arrangements. Where the underlying subject matter of the derivative contract is currency, commodities, or bonds or similar debt, regulations 7 or 8 in most cases apply to anticipatory hedges. The general effect of the regulations is to initially ignore fair value changes in the derivative for tax purposes. Regulation 10 then provides statutory rules for bringing these profits or losses back into account.
From the outset, companies have been able to make an election under regulation 6(3) to disapply regulations 7 and 8, so that the normal tax treatment applies to the derivative contracts in question. The regulations were, however, amended in December 2006 by SI 2006/3236: these changes have effect for periods of account beginning on or after 1 January 2006 and ending on or after 27 December 2006.
One of the changes was to introduce a new election under regulation 6(3A). Where a company makes this election, a different tax treatment applies to contracts, which would otherwise be within regulations 7 or 8, and for which cash flow hedge accounting is used. That different tax treatment is given by regulation 9A.
Under cash flow hedge accounting, changes in the fair value of the hedging derivative, which are attributable to the risk being hedged, are initially credited or debited to reserves. When the cash flow that is being hedged affects the company's profit or loss, amounts in reserves are released (recycled) to profit and loss account, offsetting the changes. Under the normal tax rules in FA 2002, Sch 26, such fair value profits or losses are taxed when they are taken to reserves. The effect of regulation 9A is to tax only the recycled amounts that are credited or debited to profit and loss account, so that the tax treatment follows what is in profit and loss.
Where contracts are hedging instruments in fair value or undesignated hedges, changes in their fair value will be reflected in profit and loss account. The effect of a regulation 6(3A) election is to remove such contracts from regulation 7 or 8, so that the normal tax treatment of Sch 26 applies: such fair value changes are fully taxable or relievable. Thus the overall effect of the election is that, regardless of the type of hedge, contracts that meet the regulation 7 or 8 conditions are taxed on the basis of the profit or loss account or income statement.
A company wishing to make an election under regulation 6(3A) in respect of its regulation 7 and regulation 8 contracts must make the election before 1 April 2007. A later limit will apply in either of two circumstances.
- The company adopts fair value accounting in relation to its derivative contracts for the first time, and has existing contracts to which regulations 7 or 8 would apply. It must make the election before the start of the first period of account for which it uses fair value accounting.
- The company is not a party to any contracts to which regulations 7 or 8 would apply in the first period in which it is subject to the regulations, but it subsequently acquires such contracts. It must elect within 90 days of entering into the first such contract.
An election under regulation 6(3A) cannot be revoked, even if the company's circumstances later change (for example, if it is acquired by a different group).
The election must be made in writing to HMRC. Each company within a group can decide independently whether or not to make the election, although elections by a number of group companies can be submitted in a single letter. The existing rules in regulation 6 about intra-group transfers of contracts apply where the transferor or transferee company has made a regulation 6(3A) election.
Full details can be found at www.hmrc.gov.uk/briefs/brief2207.htm.
HMRC Brief 22/07, 12 March 2007
