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KEY POINTS
- Some increased benefits possible under gift aid rules.
- Improved EIS and R&D reliefs.
- Changes for degroupings and CFC regime.
- Company car CO2 threshold reduced.
- The new furnished holiday lettings rules.
Clause 40 of the Finance (No 3) Bill 2011 enables HM Treasury to make regulations in relation to individual investment plans, such as individual savings accounts. The plan is to establish tax exempt investment plans for children – for example the ‘junior ISA’ announced by the government in October 2010 – and this was the subject of debate towards the end of the ninth sitting of the Public Bill Committee.
Unfortunately for tax aficionados, the debate consisted largely of the ‘yah, boo, sucks’ type of exchanges which seem to have characterised this year’s deliberations, with Labour members bemoaning the end of the child trust fund to which apparently 24% of parents contributed additional funds and its replacement with the junior ISA and its expected 20% level of contribution.
Meanwhile, Conservative and LibDem members pointed out that the scatter-gun and non-means tested approach of the child trust fund could not be justified when the government had to borrow money each year.
It was left to the Economic Secretary to the Treasury, Justine Greening, to bring matters to a conclusion during the tenth sitting of the committee by assuring members that HMRC would publish statistical reports on junior ISAs once they were launched. Furthermore, the Secretary of State for Education would be providing information on how looked-after children would be helped through these ISAs.
After a vote the clause was approved without amendment.
Gift aid and benefits
The next clause to be debated, clause 41, provides for an increase in the limit to the value of benefits that can be provided by a charity or community amateur sports club to an individual or corporate donor under gift aid from £500 to £2,500: ‘a big help for the big society’, as presented by Mr Osborne.
Kerry McCarthy (Lab) kicked off the debate by pointing out that charities were themselves facing cutbacks and additional costs such as the VAT increase. She wondered whether this measure would encourage increased charitable giving.
Justine Greening advised that the thinking behind the increase was that it would enable charities ‘to build sustained relationships with their largest donors’. Charities had told HMRC that the old £500 limit hindered fundraising efforts.
Perhaps it should be noted that the measure will only apply to the larger donors as the percentage limits to the value of the benefits provided as a proportion of the amount of the donation remain, i.e:
- for donations under £100: 25% of the gross value of the donation;
- for donations between £100 and £1,000: a fixed limit of £25 applies; and
- for donations of £1,000 or more: 5% of the gross value of the donation.
The 5% limit for donations of more than £1,000 was subject to a cap of £500 and it is this that is increased to £2,500; the 5% limit itself remains in place.
The clause was agreed.
EIS relief
The Finance Bill lobby notes explain that ‘clause 42 increases from 20% to 30% the rate of income tax relief to which investors are entitled when they subscribe under the enterprise investment scheme (EIS) for shares in qualifying companies. The new rate applies to shares issued on or after 6 April 2011’.
The Exchequer Secretary to the Treasury (and the Taxation Awards 2011 tax personality of the year) David Gauke explained that the EIS and other schemes would be monitored to ensure that they are targeted at genuine risk capital investments and the increase would come into play when EU state aid approval was granted. It was not anticipated that this would be refused.
The clause was ordered to stand as part of the Bill.
Research and development
Clause 43 amends CTA 2009, Part 13, and increases the rate of the additional deduction given to companies that are small or medium-sized enterprises for expenditure on research and development (R&D) and reduces the rate of the further deduction given for R&D expenditure on drugs and vaccines.
Mr Hanson (Lab) wondered why the rate of relief for small and medium-sized enterprises (SMEs) was to be reduced from 14% to 12.5% – a measure that was not announced in the Budget.
Mr Gauke explained that without the reduction, the relief would exceed the EC guideline limit for state aid for R&D expenditure.
Currently the R&D tax credit is given at 14% on 175% of the qualifying expenditure. This equates to effective relief at 24.5% of the actual expenditure, i.e:
Expenditure £100 x 175% = 175 x 14% = 24.5
The new rules change the applicable percentages so that the calculation would be:
Expenditure £100 x 200% = 200 x 12.5% = 25
The net effect is an increase in the tax relief, but this is still within the EC limits.
Mr Gauke also confirmed that SMEs carrying out vaccine research would not be adversely affected by the changes – any reductions in rates of relief are likewise being made to endure that state aid limits are not exceeded.
Having been assured that businesses would not be worse off, the clause was agreed.
Companies leaving groups
Clause 45 and Schedule 10 simplify aspects of the calculation of degrouping charges in the corporation tax regimes for chargeable gains and intangible fixed assets.
Mr Gauke explained that businesses had said that the degrouping charge rules were one of the most burdensome and complex aspects affecting groups of companies. The degrouping charge applies where, instead of selling an asset, a company sells the company that owns the asset. The rules ensure that tax is paid on gains.
The changes in Schedule 10 will ensure that any degrouping charge will be treated as additional consideration for the disposal, meaning that reliefs such as the substantial shareholding exemption will apply.
There will also be the means to reduce the amount of the degrouping charge where tax is paid on the same economic gain by way of the degrouping charge and as a chargeable gain on shares.
The aim is to prevent tax avoidance without the potential for a double tax charge. After it had been confirmed that the changes had not been extended to intangible fixed assets, the clause and schedule were approved.
Controlled foreign companies
Mr Hanson started the eleventh sitting and the debate on clause 47 by pointing out that Labour, when in government, had been committed to moving towards ‘a more territorial regime’ of company taxation. This was because the UK taxation of the profits of overseas subsidiaries was discouraging multinational companies from basing themselves in the UK.
However, he was concerned at the impact that the proposed changes would have on developing countries where such subsidiaries were based. The changes could mean that profits could be shifted out of such countries and ActionAid estimates the consequent tax loss to those poorer countries as £4 billion. Also, were the proposals a ‘give away to big business at a time of spending cuts’?
Labour was therefore proposing an amendment that the new provisions should not come into force until a full impact assessment had been carried out. It was also pointed out that the controlled foreign company (CFC) rules had to be changed as they did not comply with EU Treaty obligations.
Clause 47 and Schedule 12 make changes to the CFC rules, including exemptions for certain intra-group activities where there is limited connection with the UK and for CFCs with a low level of profits (accounts-based limit of £200,000 profits per annum).
The changes have effect for accounting periods beginning on or after 1 January 2011, other than the extension of the transitional rules.
There was much discussion of the £4 billion loss of tax that ActionAid considered might be caused to developing countries as a result of these changes, although Mr Gauke felt that this figure was ‘a significant overestimation’.
He felt that the actual figure could not be quantified – it would need to focus on tax regimes in developing countries – and clause 47 and Schedule 12 were aimed at ‘creating the most competitive corporate tax system in the G20’ by making the current CFC rules easier to operate in advance of full reform in 2012.
The debate on the ActionAid figure rambled on until proceedings were closed by a vote on the amendment which was defeated.
Mr Gauke summarised the provisions of clause 47 as introducing three new exemptions:
- removing certain intra-group trading activities from a potential CFC charge;
- exempting CFCs that derive their profits from foreign intellectual property; and
- providing an exempt period of up to three years for overseas subsidiaries that, as a result of a reorganisation or change to UK ownership, come within the scope of the CFC regime.
Another change made by cl 47 is a new de minimis exemption for CFCs with low profit levels. The threshold will be £200,000 – four times the current limit – and based on accounts profits rather than taxable profits.
Finally, Mr Gauke confirmed that the transitional rules for exempting certain holding companies have been extended by one year.
The clause was agreed, as was Schedule 12.
Foreign permanent establishments
Clause 48 and Schedule 13 give an optional exemption from corporation tax for profits arising from foreign branches of a UK company, so only UK profits will be subject to corporation tax.
Mr Gauke explained that the election would be irrevocable and that exempt profits would be defined by reference to the relevant tax treaty. If there was no treaty, the OECD model tax treaty would apply.
However, the exemption would not apply to small companies because they might be used to shelter personal income; there are also anti-avoidance provisions to prevent the artificial movement of taxable profits to exempt branches.
If losses from branches are important to a company it can remain within the current system, but if branch loss relief has been claimed and has not been matched by branch profits in the six years prior to any election then branch profits will continue to be taxed until the balance has been recouped.
Various technical amendments were made to the clause to ensure that it operated as planned.
- Chargeable gains are not within the anti-diversion rule to ensure consistency with CFC rules.
- The transitional rules apply to transferred businesses in the same way as for other businesses when exemption is applied for the first time.
- The exemption for intra-group transfers of assets will be disapplied if branch exemption is applied.
Again, Mr Gauke concluded by emphasising that these measures are part of a move to ‘a more territorial regime where we tax the profits that arise with the UK but do not try to tax profits that arise elsewhere’.
Clause 48 and Sch 13 were ordered to stand part of the Bill.
Investment trusts
Clause 49 amends CTA 2010 to provide a new definition of ‘investment trust’ and a power to make regulations about when HMRC may approve applications from a company to be an investment trust. Clause 50 inserts a new Chapter 3A into CTA 2010 providing a power to make regulations about the treatment of specified transactions of investment trusts.
There was no controversy here and Mr Hoban pointed out that the current tax regime for investment trusts had remained basically unchanged since 1965. There would be consultation on regulations and the initial regulations would be subject to debate in parliament.
Both clauses were agreed.
Company cars
With effect from 6 April 2013, clause 51 modifies the percentage bands and carbon dioxide (CO2) emissions thresholds for the calculation of company car benefits.
The current 100g CO2 per kilometre (g/km) threshold where the 11% benefit charge currently commences will be reduced to 95g/km with the benefit in kind charge then increasing by one percentage point for every 5g/km increase in emissions.
There was some discussion as to whether this was a ‘stealth tax’, with The Daily Telegraph suggesting that the driver of a two-litre Ford Mondeo would see their current tax bill rise by £76 to £2,127. Only those driving cars with less than the new 95g/km limit would be unaffected.
Against this, Justine Greening pointed out that of the 30 million cars in the UK, about 1.1 million were company cars. Furthermore, ‘the typical lifespan of a company car is four years’ and as the change would not come in for another two years, this meant that only about half of current company cars would be affected.
The change should encourage company car drivers to choose more environmentally friendly cars and this seems to have been borne out by the statistics showing that the average CO2 emission level for company cars fell from 166.6g/km in 2006 to 153.4g/km in 2009.
The clause was agreed.
Furnished holiday lettings
Mr Hanson opened the debate on the changes to the furnished holiday letting (FHL) rules.
Clause 52 and Schedule 14 make three changes to the special rules for the tax treatment of income from the commercial letting of furnished holiday accommodation.
- The special rules will apply to properties in the European Economic Area (EEA), not just in the UK.
- Tax relief for losses on FHL properties will be restricted to set off against future FHL income rather than against other income.
- The qualifying criteria for an FHL property will be tightened. The property will have to be available for letting for 210 days and actually let for 105 days; the previous limits being 140 and 75 days respectively.
The first two rules come into effect from 6 April 2011 (1 April 2011 for corporation tax) and the limit changes apply from 6 April 2012 (1 April 2012 for corporation tax).
Mr Hanson was concerned that the 105-day letting limit might be difficult to achieve, particularly in the north where there was a shorter holiday season. He also felt that clarification of what actually constituted an FHL property would be useful.
Mr Gauke noted that, when in government, Labour’s plan was simply to abolish the FHL provisions; however, these amendments were designed to maintain a competitive and stable tax system for such properties, and one which was compliant with EU law, but without excessive cost to the Exchequer.
It was for this latter reason that, while the beneficial rules for capital allowances, treatment as earned income and capital gains tax relief, etc. were retained, any losses were to be restricted to set-off against future FHL income.
The new thresholds were as suggested by the main FHL interest group as being attainable by proper commercial businesses and they had not suggested geographical differentials, which might in any event have constituted state aid.
Furthermore, there is a delay in bringing in that aspect of the rules and the thresholds do not have to be achieved in every year, but only one out of three. This is because ITTOIA 2005, s 326A will allow a ‘period of grace’.
If a property qualifies as FHL in one tax year, the owner may elect to treat the property as continuing to qualify for FHL treatment for up to two later years even though it does not meet the 105-day letting condition in those later years.
Note that the election may not be made if an averaging election under ITTOIA 2005, s 326 has been made for the same year.
With reference to the distinction between FHL and, for example, hotels and bed & breakfast businesses, Mr Gauke pointed out that the income from FHL properties was actually rental income, but was treated as earned income in some respects.
However, if the proprietor provided ‘significant services’, such as meals, to those renting the properties, then a trade may be being carried on.
Finally, the committee was assured that the government had no intention of revisiting this aspect of the tax code. It was felt that the changes were a good compromise and the clause and schedule were agreed.
Leases and accounting standards
The eleventh sitting concluded with a brief debate on clause 53, which deals with the tax treatment of leases.
Mr Gauke explained that much of this treatment is based on generally accepted accounting practice; however, there are to be fundamental changes to lease accounting in international accounting standards during 2011.
Clause 53 ensures that businesses which account for lease transactions using a new form of leasing accounting standard will be treated for tax purposes as if those changes had not taken place.
This is only a temporary measure and Mr Gauke said that ‘when the dust has settled and we have some certainty regarding the accounting changes, we will review the appropriate way forward for leasing taxation in the light of the new rules’.
The dust then settled on the eleventh sitting with clause 53 as well as clause 54 (anti-forestalling provisions on the sale of lessor companies) and clause 55 (ensuring that companies are not held to be associated through an attribution of rights, solely by virtue of relationships between individuals) were all ordered to stand part of the Finance Bill.
