The 398 page Finance Act was enacted on 19 July. The following article provides a summary of some of the key provisions - with links to further articles giving the detail. We hope you find it helpful.
Your at-a-glance guide to the key rates, allowances and thresholds included in FA 2011.
Disguised remuneration by Natalie Smith and Karen Cooper
SPEED READ The much anticipated disguised remuneration rules (contained in FA 2011 s 26, Sch 2) impose an immediate income tax charge where a relevant third party takes a relevant step by earmarking cash or assets for employees or making payments, transferring assets or making assets available to employees. The rules are drafted widely and caused concern, particularly in their application to common uses of employee benefit trusts (EBTs) in connection with employees' share schemes. Extensive amendments to broaden the scope of the statutory exemptions, together with Frequently Asked Questions have helped to clarify the rules but there are still significant implications for EBTs and certain unapproved pension arrangements.
Tainted charity donations by Toby Bushill
SPEED READ FA 2011 Sch 3 contains a new targeted anti-avoidance rule covering gift aid and various other tax relievable gifts to charity. From 1 April 2011, this effectively replaced the former substantial donor provisions. Tax relief is denied for ‘tainted donations’ which are linked to the donor obtaining a financial advantage from the recipient charity.
Derecognition of loans and derivatives by John Lindsay
SPEED READ FA 2011 Sch 4 has tightened the existing anti-avoidance measures contained in CTA 2009 ss 311–312 and ss 599A–599B and has introduced new anti-avoidance provisions (CTA 2009 ss 455A and 698A). These sections are designed to counter arrangements that seek to exploit the accounting derecognition rules in order to obtain a tax advantage from the derecognition in whole or in part of a creditor relationship or derivative contract.
Group mismatch by Ben Moseley and Stephen Weston
SPEED READ The Group Mismatch Schemes rules (in FA 2011 ss 29–30, Sch 5) target tax advantages arising from transactions in loans and derivatives involving UK group companies, and are widely drawn in an attempt to move away from reactive specific anti-avoidance. However, the rules can apply absent a tax motive and therefore all loan and derivative transactions involving two or more UK group companies need to be analysed. In practice, it should be possible to dismiss the rules quickly for most transactions, but where they do apply there are some uncertainties in their scope and application, including the calculation of the advantage which the rules seek to counter.
Sale of lessor by Kevin Paterson
SPEED READ FA 2011 (s 32–33, Sch 6) provides further changes to the sale of lessor legislation as HMRC, faced with ongoing perceived avoidance, continue to tighten the drafting. The election to prevent a charge arising on a change of ownership has been removed. In addition, the anti-avoidance provisions have been extended in relation to whether a company is covered by the legislation and the calculation of the amount of the charge.
New 'designated currency' elections by Peter Cussons
SPEED READ The new Finance Act 2011 ‘designated currency’ election is available to investment companies for accounting periods beginning on or after 1 April 2011. The election allows investment companies a significant proportion of whose assets or liabilities are denominated in that currency, or whose currency is the accounting functional currency of the parent company of the group, to elect for that currency to be its functional currency for tax purposes. There are a number of practical issues and questions however, such as companies holding multiple currency assets and/or owing multiple currency liabilities, and intermediate companies with different functional currencies. This article seeks to draw attention to these issues as well as to the planning opportunities.
Chargeable gains and value shifting by Pete Miller
SPEED READ The lengthy consultation on the taxation of chargeable gains on companies has culminated in changes to the rules on value shifting, on capital losses on changes of ownership, and on degrouping (FA 2011 ss 44–46, Schs 9–11). While the rules on value shifting and capital losses are generally simpler, the opportunity to have a single set of rules covering each of value shifting and capital losses on changes of ownership has been missed. The amended degrouping charge is simpler to operate, despite longer legislation, and will benefit many companies. But it introduces a major mismatch between the rules for tangible assets and those for intangible assets.
Foreign profits by Alastair Slater and Choi-Ling Li
SPEED READ FA 2011 ss 47–48 and Schs 12–13 make changes to the interim CFC regime (in advance of the full reform expected in 2012) and introduce an opt-in foreign branch exemption. The key changes to the CFC regime are the introduction of four new exemptions: the trading company exemption; the intellectual property exemption; the alternative de minimis profits exclusion; and the temporary period of grace exemption. The superior and international holding company regime is extended to 2012. Election into the foreign branch exemption regime appears beneficial where there is at least one major low-tax branch and foreign losses are not anticipated. The election is irrevocable and applies to all of a company’s branches, so in deciding whether to elect, a company must carefully consider its overall tax profile. However, the regime is potentially complex and election is not worthwhile just to reduce the compliance burden.
Furnished holiday lets by John Endacott
SPEED READ Finance Act 2011 changes the furnished holiday letting rules that have been in place for 27 years. The rules now apply to properties throughout the UK and the EEA but are dealt with as two separate property businesses for income and corporation tax purposes. Sideways loss relief against general income and terminal loss relief for income tax and loss relief against total profits for corporation tax are removed. The length of periods for which the accommodation must be available for letting and for which it must be actually let are both extended. Planning possibilities under the new rules involve deliberately failing the conditions or establishing the business as a trade.
Pensions by Varinder Allen
SPEED READ From 6 April 2011, the annual allowance is reduced to £50,000. Deemed contributions to defined benefit arrangements will be valued using a factor of 16 for assessment against the annual allowance. Pension savers are allowed to carry forward any unused relief up to the £50,000 annual allowance for three years. Tax charges arising as a result of exceeding the annual allowance may be settled out of pension benefits. From 6 April 2012, the lifetime allowance will be reduced to £1.5 million though there are options to protect existing pension savings.
Bank levy by Tom Aston
SPEED READ The bank levy is a completely new tax which comes into force from 1 January 2011. About 30 to 40 banking and building society groups are expected to be affected by it, with an expected yield of about £2.5 billion per year. Finance Act 2011 brings the new tax to life and explains how liability to the levy is calculated. Much of the administrative machinery for the tax is linked to the corporation tax system, but aspects such as double tax relief remain a work in progress.
Stamp taxes by Patrick Cannon
SPEED READ Finance Act 2011 seeks to block avoidance schemes based on combining so-called ‘sub-sale relief’ and the exemptions for alternative or Sharia financing of property transactions and also schemes which exploit the market value consideration rule where properties are exchanged. The changes to the rules which determine the chargeable consideration for exchanges of freeholds or leaseholds now require the SDLT charge to be on the higher of the market value of the property received or the consideration given instead of only on the market value of the property received. The Act has also introduced a relief for bulk acquisitions of dwellings together with a three-year recomputation and clawback period based on a conceptually odd comparison of what was originally intended by the purchaser versus what actually occurred in terms of the final number of dwellings.
Administration and HMRC powers by Jonathan Levy and Matthew Greene
SPEED READ HMRC have introduced new provisions relating to the administration of taxes in FA 2011 ss 85–87 and Schs 23–25. These are part of HMRC's ever widening compliance powers. Section 85 requires the giving of financial security from tax payers for payment of PAYE. Section 86 contains new provision for HMRC officers to obtain data from data-holders which can include both general data relating to a particular person and personal data such as the names and addresses of individuals. Section 87 gives effect to Council Directive 2010/24/EU concerning the mutual assistance for the recovery of claims relating to taxes, duties and other measures. This Directive expands the situations in which a Member State may obtain assistance from another Member State in recovering taxes owing to it.
VAT changes by Richard Wild
SPEED READ The VAT section of FA 2011 (ss 74–77) makes short reading, with just four substantive provisions, each of which represents changes in very specific areas: Businesses giving away samples will be pleased to see UK legislation coming into line with recent European case law; suppliers of printed matter will need to be mindful of the new supply-splitting rules, which could endanger the zero rating of their products; academy schools get their own VAT refund mechanism; and non-EU suppliers of low-value items into the UK may have breathed a temporary sigh of relief, as most of their supplies remain free of UK VAT.
The 398 page Finance Act was enacted on 19 July. The following article provides a summary of some of the key provisions - with links to further articles giving the detail. We hope you find it helpful.
Your at-a-glance guide to the key rates, allowances and thresholds included in FA 2011.
Disguised remuneration by Natalie Smith and Karen Cooper
SPEED READ The much anticipated disguised remuneration rules (contained in FA 2011 s 26, Sch 2) impose an immediate income tax charge where a relevant third party takes a relevant step by earmarking cash or assets for employees or making payments, transferring assets or making assets available to employees. The rules are drafted widely and caused concern, particularly in their application to common uses of employee benefit trusts (EBTs) in connection with employees' share schemes. Extensive amendments to broaden the scope of the statutory exemptions, together with Frequently Asked Questions have helped to clarify the rules but there are still significant implications for EBTs and certain unapproved pension arrangements.
Tainted charity donations by Toby Bushill
SPEED READ FA 2011 Sch 3 contains a new targeted anti-avoidance rule covering gift aid and various other tax relievable gifts to charity. From 1 April 2011, this effectively replaced the former substantial donor provisions. Tax relief is denied for ‘tainted donations’ which are linked to the donor obtaining a financial advantage from the recipient charity.
Derecognition of loans and derivatives by John Lindsay
SPEED READ FA 2011 Sch 4 has tightened the existing anti-avoidance measures contained in CTA 2009 ss 311–312 and ss 599A–599B and has introduced new anti-avoidance provisions (CTA 2009 ss 455A and 698A). These sections are designed to counter arrangements that seek to exploit the accounting derecognition rules in order to obtain a tax advantage from the derecognition in whole or in part of a creditor relationship or derivative contract.
Group mismatch by Ben Moseley and Stephen Weston
SPEED READ The Group Mismatch Schemes rules (in FA 2011 ss 29–30, Sch 5) target tax advantages arising from transactions in loans and derivatives involving UK group companies, and are widely drawn in an attempt to move away from reactive specific anti-avoidance. However, the rules can apply absent a tax motive and therefore all loan and derivative transactions involving two or more UK group companies need to be analysed. In practice, it should be possible to dismiss the rules quickly for most transactions, but where they do apply there are some uncertainties in their scope and application, including the calculation of the advantage which the rules seek to counter.
Sale of lessor by Kevin Paterson
SPEED READ FA 2011 (s 32–33, Sch 6) provides further changes to the sale of lessor legislation as HMRC, faced with ongoing perceived avoidance, continue to tighten the drafting. The election to prevent a charge arising on a change of ownership has been removed. In addition, the anti-avoidance provisions have been extended in relation to whether a company is covered by the legislation and the calculation of the amount of the charge.
New 'designated currency' elections by Peter Cussons
SPEED READ The new Finance Act 2011 ‘designated currency’ election is available to investment companies for accounting periods beginning on or after 1 April 2011. The election allows investment companies a significant proportion of whose assets or liabilities are denominated in that currency, or whose currency is the accounting functional currency of the parent company of the group, to elect for that currency to be its functional currency for tax purposes. There are a number of practical issues and questions however, such as companies holding multiple currency assets and/or owing multiple currency liabilities, and intermediate companies with different functional currencies. This article seeks to draw attention to these issues as well as to the planning opportunities.
Chargeable gains and value shifting by Pete Miller
SPEED READ The lengthy consultation on the taxation of chargeable gains on companies has culminated in changes to the rules on value shifting, on capital losses on changes of ownership, and on degrouping (FA 2011 ss 44–46, Schs 9–11). While the rules on value shifting and capital losses are generally simpler, the opportunity to have a single set of rules covering each of value shifting and capital losses on changes of ownership has been missed. The amended degrouping charge is simpler to operate, despite longer legislation, and will benefit many companies. But it introduces a major mismatch between the rules for tangible assets and those for intangible assets.
Foreign profits by Alastair Slater and Choi-Ling Li
SPEED READ FA 2011 ss 47–48 and Schs 12–13 make changes to the interim CFC regime (in advance of the full reform expected in 2012) and introduce an opt-in foreign branch exemption. The key changes to the CFC regime are the introduction of four new exemptions: the trading company exemption; the intellectual property exemption; the alternative de minimis profits exclusion; and the temporary period of grace exemption. The superior and international holding company regime is extended to 2012. Election into the foreign branch exemption regime appears beneficial where there is at least one major low-tax branch and foreign losses are not anticipated. The election is irrevocable and applies to all of a company’s branches, so in deciding whether to elect, a company must carefully consider its overall tax profile. However, the regime is potentially complex and election is not worthwhile just to reduce the compliance burden.
Furnished holiday lets by John Endacott
SPEED READ Finance Act 2011 changes the furnished holiday letting rules that have been in place for 27 years. The rules now apply to properties throughout the UK and the EEA but are dealt with as two separate property businesses for income and corporation tax purposes. Sideways loss relief against general income and terminal loss relief for income tax and loss relief against total profits for corporation tax are removed. The length of periods for which the accommodation must be available for letting and for which it must be actually let are both extended. Planning possibilities under the new rules involve deliberately failing the conditions or establishing the business as a trade.
Pensions by Varinder Allen
SPEED READ From 6 April 2011, the annual allowance is reduced to £50,000. Deemed contributions to defined benefit arrangements will be valued using a factor of 16 for assessment against the annual allowance. Pension savers are allowed to carry forward any unused relief up to the £50,000 annual allowance for three years. Tax charges arising as a result of exceeding the annual allowance may be settled out of pension benefits. From 6 April 2012, the lifetime allowance will be reduced to £1.5 million though there are options to protect existing pension savings.
Bank levy by Tom Aston
SPEED READ The bank levy is a completely new tax which comes into force from 1 January 2011. About 30 to 40 banking and building society groups are expected to be affected by it, with an expected yield of about £2.5 billion per year. Finance Act 2011 brings the new tax to life and explains how liability to the levy is calculated. Much of the administrative machinery for the tax is linked to the corporation tax system, but aspects such as double tax relief remain a work in progress.
Stamp taxes by Patrick Cannon
SPEED READ Finance Act 2011 seeks to block avoidance schemes based on combining so-called ‘sub-sale relief’ and the exemptions for alternative or Sharia financing of property transactions and also schemes which exploit the market value consideration rule where properties are exchanged. The changes to the rules which determine the chargeable consideration for exchanges of freeholds or leaseholds now require the SDLT charge to be on the higher of the market value of the property received or the consideration given instead of only on the market value of the property received. The Act has also introduced a relief for bulk acquisitions of dwellings together with a three-year recomputation and clawback period based on a conceptually odd comparison of what was originally intended by the purchaser versus what actually occurred in terms of the final number of dwellings.
Administration and HMRC powers by Jonathan Levy and Matthew Greene
SPEED READ HMRC have introduced new provisions relating to the administration of taxes in FA 2011 ss 85–87 and Schs 23–25. These are part of HMRC's ever widening compliance powers. Section 85 requires the giving of financial security from tax payers for payment of PAYE. Section 86 contains new provision for HMRC officers to obtain data from data-holders which can include both general data relating to a particular person and personal data such as the names and addresses of individuals. Section 87 gives effect to Council Directive 2010/24/EU concerning the mutual assistance for the recovery of claims relating to taxes, duties and other measures. This Directive expands the situations in which a Member State may obtain assistance from another Member State in recovering taxes owing to it.
VAT changes by Richard Wild
SPEED READ The VAT section of FA 2011 (ss 74–77) makes short reading, with just four substantive provisions, each of which represents changes in very specific areas: Businesses giving away samples will be pleased to see UK legislation coming into line with recent European case law; suppliers of printed matter will need to be mindful of the new supply-splitting rules, which could endanger the zero rating of their products; academy schools get their own VAT refund mechanism; and non-EU suppliers of low-value items into the UK may have breathed a temporary sigh of relief, as most of their supplies remain free of UK VAT.
