Tax and the City: briefing for February 2013

GAAR interim advisory panel
There has been quite a bit of frustration expressed at the fact that the draft guidance on the proposed new general anti-abuse rule (GAAR) released in December included only a handful of easy examples, where the assumed fact patterns would point fairly clearly to the GAAR applying or not applying. Following the announcement on 25 January of appointments to the interim advisory panel (www.hmrc.gov.uk/news/gaar.htm), which is tasked with approving the final form of the initial guidance, the chances of the guidance sensibly tackling some of the more difficult scenarios are not looking good – at least not if unanimous approval is required.

Whilst most of the interim panel members will be concerned to ensure that there is a meaningful indication of where the boundaries are intended to lie, so as to limit damage to business confidence and competitiveness, it seems unlikely that those appointees representing the ‘wider taxpayer interest’ are going to accept that any shade of grey should be out of scope. A cynic might be tempted to think that this rather plays into HMRC’s hands: HMRC has been concerned all along to prevent the creation of any ‘safe harbours’ and, if the guidance only deals with the black and white cases due to the lack of consensus between panel members on anything else, then mission accomplished (and without HMRC needing itself to be represented on the panel).

There has been no clear public message about what a GAAR is for, namely to deter and counteract scheming, and what it will not (or at any rate should not) be used for, which is to counter routine planning techniques which emerge just because of the way that the tax regime is structured. Wealthy individuals enveloping their homes in companies so as to allow sale free of SDLT and, in the case of non-doms, to minimise direct tax exposures is an obvious private client example of routine planning, but it would seem to cause as much indignation amongst the tax illiterate as, say, the K2 scheme. It needs to be clarified that ordinary tax planning is not the target of the GAAR and should only be addressed through law change if that is what government decides.

Residential property taxes
Draft legislation for the new annual residential property tax (ARPT) was published on 31 January. Non-natural persons (companies, partnerships with a corporate member, collective investment schemes: NNPs) will be subject to an annual charge on residential properties which they own with a market value in excess of £2m, with the first chargeable period beginning with 1 April 2013 and ending on 31 March 2014. The charge will apply on a sliding scale: £15,000 for properties between £2m and £5m, £35,000 for properties between £5m and £10m, £70,000 for properties between £10m and £20m, and £140,000 for properties worth over £20m. The intention is to encourage those who have enveloped their homes to collapse the envelopes, presumably prior to any new CGT charge biting (see further below), although it is a rather obvious point that, for the wealthiest, £140,000 may be a small price to pay for the other benefits (including anonymity) which come with corporate ownership. There is provision for the chargeable amounts to be indexed in line with the consumer prices index and market value is to be determined as at 1 April 2012, and each 1 April falling five years (or a multiple of five years) after 1 April 2012, and otherwise on acquisition or disposal.

The charge is reduced to the extent that any of the days falling within the chargeable period are ‘relievable days’. Reliefs are available for property rental businesses (although note that this does not include renting to family, including extended family such as in-laws and their relatives), trades involving making properties open to the public, property development trades and property trading businesses, in each case provided that the trade or business is run on a commercial basis with a view to profit, and for properties occupied by qualifying employees and farm workers. NNPs which expect all of the days in a chargeable period to be relievable days can claim ‘provisional relief’ in their ARPT return.

ARPT returns must include a self-assessment, which effectively puts the onus on the NNP to get the valuation right.

Also published on 31 January was draft legislation designed to align the reliefs from the 15% SDLT charge imposed on NNPs acquiring £2m plus residential properties with the ARPT reliefs with effect from the date on which FB 2013 receives Royal Assent (relief is currently only available for companies acting as trustee and property developers with a two year trading history) and draft legislation subjecting NNPs to a CGT charge at 28% on the post 5 April 2013 portion of any gain made on disposal of a property which is subject to ARPT.

Following consultation, HMRC has decided to pursue its suggestion that UK resident NNPs should be subject to the same CGT charge as non-UK resident NNPs – so that the 28% CGT charge will displace a liability to corporation tax on chargeable gains at (in most cases) the small profits rate of 20% for UK resident companies within the scope of ARPT. The new rules are quite complex, given the need first to isolate the post 5 April portion of any gain, then work out the extent to which that portion is ARPT-related (bearing in mind the relievable day concept) and finally to confer a notional indexation allowance on the bit that is not ARPT-related. And that is without bringing losses into the equation. If the prospect of the charges themselves is not sufficient encouragement to dis-envelop, the complexity might be – all part of the master plan, perhaps.

Those thinking about extracting their homes from NNPs to avoid the new charges ought therefore to get on with it. Whilst the SDLT rule that deems transactions between connected persons to be made for a market value consideration and so liable to SDLT is generally switched off where the transaction is a distribution of assets from a company to its shareholders (whether by way of dividend or on a winding up), extraction free of CGT will become more difficult from 6 April.

Tax transparent funds
Near final drafts of the regulations governing the new regulated contractual fund vehicle to be introduced in the UK were also published at the end of January. Whilst the contractual model has been around in other jurisdictions for some time, UK regulated funds have had to choose between company and unit trust status, both of which lead to tax opaque treatment (albeit with features designed to move the tax point to the investor for certain income streams).

Under these new proposals, funds set up as partnerships and in contractual form will be able to seek FSA authorisation and operate on a tax transparent basis (subject to the investor exception mentioned below). The government hopes the move will allow the UK to compete as a potential domicile for master funds following implementation of the Undertakings for Collective Investments in Transferable Securities IV Directive (UCITS IV).

One set of regulations aligns the CGT treatment of investors in an authorised contractual scheme (non-partnership version) with that of investors in overseas equivalents: essentially such schemes are regarded as CGT opaque from an investor perspective, so that the chargeable asset is the unit in the scheme, not a share of the underlying property of the fund. Authorised contractual schemes which are partnerships will be subject to the same CGT rules as any other partnership – each partner will be treated as owning its proportionate share of the underlying assets. The other sets of regulations contain stamp duty and SDRT exemptions for transfer of units in authorised contractual schemes and a VAT exemption for the supply of management services to an authorised contractual scheme.

Italy: financial transaction tax
Italy has followed France’s suit and introduced its own financial transaction tax (FTT). It will apply to transfers of shares and certain participating financial instruments issued by Italian tax resident companies (including securities representing them, such as depositary receipts). The FTT will be due on the value of the relevant transaction at a rate of 0.2% (or 0.1% for on-market transactions) and will be payable by the transferee. Derivatives the underlying subject matter of which consists mainly of relevant shares will also be subject to FTT at varying rates. A special rate of 0.02% will apply to high-frequency trading transactions in relevant shares and derivatives. The charge will apply from 1 March 2013 for non-derivative transactions, and from 1 July 2013 for derivatives. The key point to note is that relevant transactions will be taxable regardless of the place where they are executed and the residence of the counterparties, and so the new FTT will be relevant to traders in London and elsewhere where the trades involve Italian equities.

DMW … something or other
DMWSHNZ Ltd v HMRC [2013] UKFTT 037 (TC) – not a case name which trips off the tongue, it must be said – involved planning designed to crystallise some unrealised losses with a view to using them to shelter a heldover gain which was to be triggered on the redemption of certain third party loan notes held by another group company, with an election under TCGA 1992 s 171A being used to achieve that shelter. At the time, s 171A allowed a gain to be allocated to another group member where the gain arose on a disposal of an asset to a third party. The First-tier Tribunal found that ‘disposal of an asset to a third party’ required there to be a disposal by the group company and an acquisition by the third party and that the third party issuer of the relevant notes did not acquire anything on their redemption. Interestingly, the case turned entirely on this technical point and there was no suggestion on the part of HMRC that the planning would not have been legitimate had it worked. Section 171A is more favourably framed these days.