Your guide to the newly enacted Finance Act, by EY.
The following summary of FA 2015 is provided by EY. For further information, contact Claire Hooper or Chris Sanger.
On 24 March 2015, the UK government published the 2015 Finance Bill and the Bill progressed through all its stages in the House of Commons on 25 March. Royal assent was granted on 26 March, prior to the dissolution of Parliament on 30 March.
The Act brings together and updates some of the draft clauses published in December 2014 with some of the measures announced more recently in Budget 2015. Changes have been made to a number of the draft clauses which were subject to consultation. Other proposals will be deferred to later Finance Bills, subject to the result of the upcoming election. All references below are to FA 2015, unless stated otherwise.
From a corporate perspective, the measure that has attracted most attention is the diverted profits tax (DPT) which took effect from 1 April 2015. The legislation has been restructured and rewritten with the aim of making it easier to follow and reducing the reliance on the phrase ‘reasonable to assume.’ While HMRC published an overview of proposed changes on 20 March, together with draft legislation on some of those changes, further changes became apparent with the publication of the rules in full. These include changes to the definition of economic substance and the tax mismatch condition.
Other significant corporate tax measures include anti-avoidance measures addressing the use of brought forward losses (effective 18 March 2015) and capital allowances in respect of sale and leaseback transactions between connected parties (effective 26 February 2015). There are measures supporting specific industries, notably the oil and gas industry, and the extension of the creative industry reliefs as well as measures asking the banks to contribute more, including the rise in the rate of the bank levy.
From a personal tax perspective, the Act includes the legislation imposing CGT on the disposal of UK residential property by non-residents. Details are now provided of the obligation on a person who makes a ‘non-resident disposal’ to submit a return to HMRC and pay tax due. Further detail of the interaction with existing provisions are also included in the Act, as well as a provision to allow non-resident companies which are part of a group to elect to pool losses and gains arising from the disposal of UK residential property. The new rules for disguised investment management fees (which treat sums received by individuals providing investment advice as trading income in certain circumstances) have been amended to extend the definition of ‘carry’ and thus exclude more commercial arrangements from the scope of these rules. There are also new provisions allowing anyone, including non-dependents, to receive payments from an annuity on the death of a pension scheme member, as well as amendments to ITEPA 2003 to allow payments of these beneficiaries’ annuities to be tax-free on the death of an individual before age 75.
Detail to be provided in regulations
The Act provides the basis for future regulations which will bring in the detail behind measures such as the implementation of country-by-country reporting in the UK and an exemption from withholding tax for private placements. The measure aimed at UK partly exempt businesses, which seeks to restrict the recovery of VAT on overhead costs used to support their foreign branches, will similarly be introduced by secondary legislation.
Measures not in the Act
As 2015 is an election year, a number of measures have been held back for later Finance Bills and depending on the results of the election, there may be two more Finance Bills this year.
Measures announced at the time of the draft clauses but not included in FA 2015 include: proposals for the reform of the taxation of corporate debt and derivatives; new powers for the direct recovery of debts; and the strengthening of sanctions for tax avoidance.
A number of Budget 2015 measures including the proposed corporation tax disallowance for compensation payments for mis-selling of products such as payment protection insurance and the increased flexibility of the individual savings account (ISA) rules are also not included in the Act.
Part 3 of the Act contains the DPT legislation which came into force on 1 April 2015. Updated guidance on the legislation was published on 30 March.
HMRC had already announced a number of changes on 20 March 2015 to the consultation draft issued in December 2014. These include a narrowing of the notification requirement and changes to the rules giving credit for other taxes to include controlled foreign companies (CFC) charges. The scope of the rules on avoided permanent establishments (PE) has also been expanded to include sales outside the UK that relate to UK activity, as well as supplies of any property (such as land and buildings). However, there are exclusions from the avoided PE rule for foreign companies that have less than £10m of UK-related sales not otherwise brought within the UK tax net or £1m of UK-related expenses (for instance, occasional visits to the UK by executives overseeing local operations).
The Act contains some changes over and above those highlighted on 20 March, including amendments to the tax mismatch condition and the insufficient economic substance conditions.
With the legislation now in force, businesses should consider in detail whether the rules apply and, in particular, undertake a review of their transfer pricing, applying a full value chain approach. Groups can then use the results to proactively engage with HMRC to demonstrate that no notification is required under the DPT rules. It is important to undertake a two-sided analysis as soon as possible as this may result in a different conclusion regarding the right point in an arm’s length range compared with a historic one-sided analysis.
The application of the DPT to the oil and gas industry has been clarified to make it clear the supplementary charge is a ‘relevant tax’ for the purposes of the ‘effective tax mismatch’ test; consequently, transactions that give rise to a ring fence deduction may be an effective tax mismatch if the counterparty suffers additional tax at less than 40%. The rate of DPT has been set at 55% where the ‘diverted’ profits are ring fence profits.
Measures introduced to support the UK oil and gas industry include:
The cluster area allowance and ring fence expenditure supplement legislation broadly follow the drafts released in December 2014, and the investment allowance legislation has been put together following a brief consultation period with the industry in early 2015. It is positive that government has reacted very quickly to the current difficulties faced by the industry by introducing the investment allowance. However, the speed of the process has meant that various issues raised during the consultation have been set aside to be dealt with by means of future legislation.
This new anti-avoidance measure around the refreshing of brought-forward losses was announced in the Budget. The legislation in Sch 3 prevents the offset of brought-forward trading losses, non-trading deficits or management expenses against profits if the profits result in a ‘deductible amount’ arising in the company, or a connected company, as part of arrangements aimed at achieving a corporation tax advantage, and where it is reasonable to assume that the ‘tax value’ of the arrangements exceeds the ‘non-tax value.’ This new measure applies on or after 18 March 2015, when a notional accounting period starts.
A technical note has been published by HMRC which provides more detail on the circumstances and manner in which the proposed legislation will operate and provides examples.
This measure restricts the amount of banks’ taxable profits that can be offset by losses existing at 1 April 2015 to 50%. There are minor amendments in Sch 2 to the provisions released in draft last December, including a change to the targeted anti-avoidance rule. In addition, following consultation, an amendment has been included to allow up to £25m of losses arising in groups headed up by building societies to remain unrestricted. These provisions are effective from 1 April 2015, though the anti-avoidance provision is effective from 3 December 2014.
The following changes announced in Budget 2015 are confirmed:
These changes apply from 1 April 2015 (though the film tax relief changes are subject to European Commission approval).
Some measures published in draft last December are included in the Act, largely unchanged. These include:
Schedule 10 also includes an anti-avoidance rule announced on, and effective from, 26 February 2015, which prevents plant and machinery allowances being available on the acquisition of plant and machinery from a seller (or connected person) that had previously acquired it without incurring capital or qualifying revenue expenditure. Section 45 also extends the enhanced capital allowances scheme for zero-emission goods vehicles for a further three years to 31 March or 5 April 2018, for corporation tax or income tax purposes respectively. Finally, s 26 restricts relief for internally-generated goodwill transfers between related parties.
The provisions included in draft last December relating to consortium link companies do not appear in the Act, even though it was indicated in the Budget that they would be so included. These were intended to remove, with effect from 10 December 2014, the more restrictive requirements that currently apply in the group relief rules where a consortium link company is resident in the European Economic Area but outside the UK.
New ‘disguised investment management fee’ rules, announced at the time of the Autumn Statement, are amended in s 21 of the Act. The rules will apply where an individual provides investment management services to a collective investment scheme involving a partnership and will apply to sums arising on or after 6 April 2015.
Where the rules apply, an individual will be treated as receiving disguised fee income where they receive any sum from a collective investment scheme (including a loan or allocation of profit) which is not ‘carry,’ a return or repayment of amounts invested, or a commercial return on amounts invested. The amount will be treated as trading income of the individual where it would not otherwise be taxed either as income from a trade or as employment income (e.g. remuneration via the fund manager vehicle). To the extent that the investment advice is given in the UK, any amounts treated as disguised investment management fees will also be treated as UK source income.
The Act expands the concept of carry; beyond the narrow definition contained in the December draft clauses to include amounts received by way of ‘profit related return.’ However, such amounts will remain taxable as trading income to the extent that there is no ‘significant risk’ of receipt. ‘Significant risk’ is not defined for this purpose and this is likely to be an area where HMRC guidance is key. The Act also includes provisions to allow further amendments to the rules by way of statutory instrument.
The Act includes provisions in Sch 7 to extend the CGT charge to non-UK residents in respect of the disposal of UK residential property with effect from 6 April 2015. The new tax is only intended to apply to gains arising on or after 6 April 2015 and a number of rebasing measures are available for those within the charge whose property was acquired before that date. To the extent that gains on high value residential property are subject to an annual tax on enveloped dwellings (ATED) related capital gain, this will take priority over the new charge. The new charge will, however, take priority over existing anti-avoidance legislation, which attributes gains to UK participators in non-UK resident companies and to settlors and beneficiaries of non-UK resident trusts. It will also take priority over provisions that attribute gains to individuals who return to the UK after a period of non-residence.
The Act includes new provisions for the submission of tax returns covering the charge (NRCGT returns). NRCGT returns must be submitted by the 30th day following completion of the disposal of UK residential property. These must include a calculation of the gain (an ‘advance self-assessment’) unless the taxpayer has received a self-assessment tax return for that year or a previous year or has submitted an ATED return for the preceding chargeable period. Where the NRCGT return includes an advance self-assessment, a payment on account of the tax is due at the same time as the return.
New provisions extend holdover and rollover relief to qualifying disposals of UK residential property in certain circumstances for gains which would otherwise be subject to NRCGT.
The Act contains provisions allowing eligible non-resident companies owning UK residential property to make an irrevocable election to form a pooling group. This enables NRCGT gains and losses made by the members of the group to be pooled, and for intra-group disposals of property to be disregarded.
Non-resident individuals and trustees will pay CGT at the same rates as UK resident individuals and trustees (i.e. 18% and 28%) and companies within the charge will pay tax at 20%.
As expected, the Act also includes changes, in Sch 9, to private residence relief, which provides 100% CGT relief for disposals of an individual’s only or main residence.
With effect from 6 April 2015, it will only be possible to claim private residence relief in a tax year for a property in a country in which an individual (or spouse) is resident, or where the individual (or spouse) spends at least 90 days in that property or other properties in the same jurisdiction. The definition of a day spent at the property (previously a ‘present at midnight test’) has been amended slightly to allow for those who ‘stay overnight’ at the property without being present at midnight. This may still cause problems for shift workers and HMRC guidance is needed on what is meant by an overnight stay. Where an individual qualifies for the relief for part of the period, only part of the gain will be exempt.
For those who are subject to non-UK resident CGT in respect of their disposal, periods prior to 6 April 2015 will not be counted for the purpose of private residence relief unless the individual meets certain conditions and makes an election.
A principal private residence election is still possible but the interaction between making an election and non-resident periods is complex and will need to be reconsidered before any disposal.
The Act contains a number of updates to entrepreneurs’ relief (ER).
Amendments are made to measures announced at Autumn Statement designed to remove ER from sales of goodwill to close companies. Under the amended legislation in s 42, such sales will continue to qualify for the relief where the sale takes place to a close company with which the seller has no connection. These rules, as amended, still apply to disposals on or after 3 December 2014.
Also included in the Act, in s 43, are measures announced at the Budget to restrict the availability of ER for shareholdings in structures involving joint ventures (where the management company is neither a holding company of a trading group nor trading in its own right). ER is also restricted, by s 41, for associated disposals which must now accompany a sale of at least a 5% shareholding in the company or in the assets of the partnership carrying on the business. Legislative clauses to introduce these two restrictions were published at the time of the Budget and apply from 18 March 2015.
As announced at Autumn Statement, there are also measures to allow ER to apply to gains which have been deferred by reinvestment into enterprise investment schemes or social investment tax relief.
New provisions included in the Act build on those made in the Taxation of Pensions Act 2014 in respect of payments of income withdrawal from a drawdown fund on the death of an individual.
The legislation, in Sch 4, sets out when annuities, paid following the death of a pension scheme member, can be paid as an authorised payment to anyone other than a dependent. It also sets out when these payments are taxed against the member’s lifetime allowance.
Changes are then made to ITEPA 2003 to provide an exemption from income tax for annuities payable on the death of a person before age 75 in certain prescribed circumstances.
The changes have effect from 6 April 2015.
The Act includes details of the measure announced in Budget 2015 to ensure that the CGT exemption for certain wasting assets is only available where the assets have been used in the seller’s own business (previously it was possible to loan or rent assets to another business and so qualify for the exemption).
The Act also includes the following provisions that were set out in the December draft Finance Bill clauses:
The employment tax clauses in the Act originate mainly from the chancellor’s announcement, at Budget 2014, of four main measures following the Office of Tax Simplification’s (OTS) review of employee benefits in kind (BiKs) and expenses.
Parliament has decided not to legislate for an exemption for trivial BiKs in FA 2015. This is despite proposals in the Budget of 18 March 2015 for the introduction of anti-avoidance measures to prevent any perceived misuse of the proposed trivial benefit exemption by closely controlled businesses. This means that the draft statutory exemption which would allow employers to identify certain low value BiKs as ‘trivial’ and hence exempt from income tax and NICs, will not come into force from 6 April 2015 as expected. The measure, subject to conditions and as originally drafted, gave scope to provide multiple trivial benefits in a tax year.
As expected, measures are included in the Act, in Sch 1, to amend ITEPA 2003 and abolish the longstanding £8,500 threshold for ‘higher paid employment’ meaning that all employees will be taxed on their BiKs and expenses in the same way. Exemptions have been introduced to mitigate the effects of the abolition of the threshold for BiKs for ministers of religion earning at a rate of less than £8,500 and a further exemption has been introduced for employees who work as caregivers in respect of board and lodging that is provided in the home of the person who they are caring for. The relevant NICs legislation has also been amended to align the NICs and the income tax treatments. These measures will take effect from 6 April 2016.
The measures regarding the proposed exemption for paid or reimbursed expenses have been included in the Act, in s 11, as originally drafted but with some significant amendments. The measures will allow employers to exempt from income tax, expenses payments and BiKs provided to employees where the employee would have been eligible for a deduction had they incurred and paid an amount equal to the expense themselves. The measures also do away with the current system that allows employers to apply to HMRC for a ‘dispensation’ in respect of paid or reimbursed expenses where ultimately there is no liability to tax. The processes outlined in the draft clauses which set out the required approval to pay or reimburse expenses at a flat rate remain unchanged in the Act.
However, the payment or reimbursement cannot be provided as part of ‘relevant salary sacrifice arrangements.’ The definition of such arrangements, whenever made, before or after the employment began, has now been widened from scenarios where an employee simply gives up a right to receive earnings in return for the provision of the benefit, to include scenarios where the amount of earnings received depends on the provision of the benefit.
The measures also now include a targeted anti-avoidance rule. This prevents the exemption from applying to expenses and BiKs which are provided as part of arrangements that reduce the earnings of the employee chargeable to tax and NICs and one of the main purposes of the arrangement is to avoid tax or NICs.
The measures confirm the changes required to abolish the current dispensation regime from 6 April 2016. Parallel changes will also be made to the NICs legislation. However, these measures now include provisions which allow HMRC to revoke a ‘pre-commencement dispensation’ from a date earlier than 6 April 2016. A ‘pre-commencement dispensation’ is one which HMRC has given under existing provisions and is in place immediately before 6 April 2016.
The Act amends ITEPA 2003 to allow HMRC to amend the PAYE regulations to collect income tax on specified BiKs through PAYE with effect from 6 April 2016. The government has decided that, as a first step, a limited number of BiKs can be payrolled; namely those for cars, car fuel medical insurance and gym membership. Once payrolling has been established, the government will consider how other BiKs can be payrolled.
Section 17 of the Act amends existing legislation in TMA 1970. This allows HMRC to issue penalties, without issuing proceedings before the First-tier Tribunal, where the penalty relates to the late filing of, non-submission of or incorrect or incomplete, quarterly returns by employment intermediaries from 6 April 2015. The first of the employment intermediaries information quarterly return is due to be submitted by 5 August 2015.
The draft Finance Bill clauses published in December included indirect tax measures relating to:
These clauses appear largely unchanged in the Act.
As announced in the Budget, the Act also provides for VAT refunds to palliative care charities and medical courier charities in relation to their non-business activities with effect from 1 April 2015.
The Budget measure aimed at UK partly exempt businesses which seeks to restrict the recovery of VAT on overhead costs used to support their foreign branches will be introduced by secondary legislation. The draft legislation was published on 18 March. The new rules will have effect for partial exemption tax years beginning on or after 1 August 2015.
As expected, the Act, in Sch 18, extends the accelerated payments regime to cover circumstances where the company involved in the dispute has surrendered the advantage to another company by way of group relief. This change applies to group relief surrenders whenever they were made, provided that all the necessary requirements for an accelerated payment are met.
This extension of the regime follows the extension of the regime to cover NICs (effective 12 April 2015). Both steps are consistent with Osborne’s Budget promise that more accelerated payment notices will be issued to ‘those who hold out from paying the tax that is owed.’
The following measures were included in the December draft Finance Bill clauses and are largely unchanged:
New measures targeted at serial users of tax avoidance schemes that fail are to be introduced, alongside specific tax geared penalties for cases tackled by the general anti-abuse rule (GAAR), but these measures will be contained in a future Finance Bill.
Your guide to the newly enacted Finance Act, by EY.
The following summary of FA 2015 is provided by EY. For further information, contact Claire Hooper or Chris Sanger.
On 24 March 2015, the UK government published the 2015 Finance Bill and the Bill progressed through all its stages in the House of Commons on 25 March. Royal assent was granted on 26 March, prior to the dissolution of Parliament on 30 March.
The Act brings together and updates some of the draft clauses published in December 2014 with some of the measures announced more recently in Budget 2015. Changes have been made to a number of the draft clauses which were subject to consultation. Other proposals will be deferred to later Finance Bills, subject to the result of the upcoming election. All references below are to FA 2015, unless stated otherwise.
From a corporate perspective, the measure that has attracted most attention is the diverted profits tax (DPT) which took effect from 1 April 2015. The legislation has been restructured and rewritten with the aim of making it easier to follow and reducing the reliance on the phrase ‘reasonable to assume.’ While HMRC published an overview of proposed changes on 20 March, together with draft legislation on some of those changes, further changes became apparent with the publication of the rules in full. These include changes to the definition of economic substance and the tax mismatch condition.
Other significant corporate tax measures include anti-avoidance measures addressing the use of brought forward losses (effective 18 March 2015) and capital allowances in respect of sale and leaseback transactions between connected parties (effective 26 February 2015). There are measures supporting specific industries, notably the oil and gas industry, and the extension of the creative industry reliefs as well as measures asking the banks to contribute more, including the rise in the rate of the bank levy.
From a personal tax perspective, the Act includes the legislation imposing CGT on the disposal of UK residential property by non-residents. Details are now provided of the obligation on a person who makes a ‘non-resident disposal’ to submit a return to HMRC and pay tax due. Further detail of the interaction with existing provisions are also included in the Act, as well as a provision to allow non-resident companies which are part of a group to elect to pool losses and gains arising from the disposal of UK residential property. The new rules for disguised investment management fees (which treat sums received by individuals providing investment advice as trading income in certain circumstances) have been amended to extend the definition of ‘carry’ and thus exclude more commercial arrangements from the scope of these rules. There are also new provisions allowing anyone, including non-dependents, to receive payments from an annuity on the death of a pension scheme member, as well as amendments to ITEPA 2003 to allow payments of these beneficiaries’ annuities to be tax-free on the death of an individual before age 75.
Detail to be provided in regulations
The Act provides the basis for future regulations which will bring in the detail behind measures such as the implementation of country-by-country reporting in the UK and an exemption from withholding tax for private placements. The measure aimed at UK partly exempt businesses, which seeks to restrict the recovery of VAT on overhead costs used to support their foreign branches, will similarly be introduced by secondary legislation.
Measures not in the Act
As 2015 is an election year, a number of measures have been held back for later Finance Bills and depending on the results of the election, there may be two more Finance Bills this year.
Measures announced at the time of the draft clauses but not included in FA 2015 include: proposals for the reform of the taxation of corporate debt and derivatives; new powers for the direct recovery of debts; and the strengthening of sanctions for tax avoidance.
A number of Budget 2015 measures including the proposed corporation tax disallowance for compensation payments for mis-selling of products such as payment protection insurance and the increased flexibility of the individual savings account (ISA) rules are also not included in the Act.
Part 3 of the Act contains the DPT legislation which came into force on 1 April 2015. Updated guidance on the legislation was published on 30 March.
HMRC had already announced a number of changes on 20 March 2015 to the consultation draft issued in December 2014. These include a narrowing of the notification requirement and changes to the rules giving credit for other taxes to include controlled foreign companies (CFC) charges. The scope of the rules on avoided permanent establishments (PE) has also been expanded to include sales outside the UK that relate to UK activity, as well as supplies of any property (such as land and buildings). However, there are exclusions from the avoided PE rule for foreign companies that have less than £10m of UK-related sales not otherwise brought within the UK tax net or £1m of UK-related expenses (for instance, occasional visits to the UK by executives overseeing local operations).
The Act contains some changes over and above those highlighted on 20 March, including amendments to the tax mismatch condition and the insufficient economic substance conditions.
With the legislation now in force, businesses should consider in detail whether the rules apply and, in particular, undertake a review of their transfer pricing, applying a full value chain approach. Groups can then use the results to proactively engage with HMRC to demonstrate that no notification is required under the DPT rules. It is important to undertake a two-sided analysis as soon as possible as this may result in a different conclusion regarding the right point in an arm’s length range compared with a historic one-sided analysis.
The application of the DPT to the oil and gas industry has been clarified to make it clear the supplementary charge is a ‘relevant tax’ for the purposes of the ‘effective tax mismatch’ test; consequently, transactions that give rise to a ring fence deduction may be an effective tax mismatch if the counterparty suffers additional tax at less than 40%. The rate of DPT has been set at 55% where the ‘diverted’ profits are ring fence profits.
Measures introduced to support the UK oil and gas industry include:
The cluster area allowance and ring fence expenditure supplement legislation broadly follow the drafts released in December 2014, and the investment allowance legislation has been put together following a brief consultation period with the industry in early 2015. It is positive that government has reacted very quickly to the current difficulties faced by the industry by introducing the investment allowance. However, the speed of the process has meant that various issues raised during the consultation have been set aside to be dealt with by means of future legislation.
This new anti-avoidance measure around the refreshing of brought-forward losses was announced in the Budget. The legislation in Sch 3 prevents the offset of brought-forward trading losses, non-trading deficits or management expenses against profits if the profits result in a ‘deductible amount’ arising in the company, or a connected company, as part of arrangements aimed at achieving a corporation tax advantage, and where it is reasonable to assume that the ‘tax value’ of the arrangements exceeds the ‘non-tax value.’ This new measure applies on or after 18 March 2015, when a notional accounting period starts.
A technical note has been published by HMRC which provides more detail on the circumstances and manner in which the proposed legislation will operate and provides examples.
This measure restricts the amount of banks’ taxable profits that can be offset by losses existing at 1 April 2015 to 50%. There are minor amendments in Sch 2 to the provisions released in draft last December, including a change to the targeted anti-avoidance rule. In addition, following consultation, an amendment has been included to allow up to £25m of losses arising in groups headed up by building societies to remain unrestricted. These provisions are effective from 1 April 2015, though the anti-avoidance provision is effective from 3 December 2014.
The following changes announced in Budget 2015 are confirmed:
These changes apply from 1 April 2015 (though the film tax relief changes are subject to European Commission approval).
Some measures published in draft last December are included in the Act, largely unchanged. These include:
Schedule 10 also includes an anti-avoidance rule announced on, and effective from, 26 February 2015, which prevents plant and machinery allowances being available on the acquisition of plant and machinery from a seller (or connected person) that had previously acquired it without incurring capital or qualifying revenue expenditure. Section 45 also extends the enhanced capital allowances scheme for zero-emission goods vehicles for a further three years to 31 March or 5 April 2018, for corporation tax or income tax purposes respectively. Finally, s 26 restricts relief for internally-generated goodwill transfers between related parties.
The provisions included in draft last December relating to consortium link companies do not appear in the Act, even though it was indicated in the Budget that they would be so included. These were intended to remove, with effect from 10 December 2014, the more restrictive requirements that currently apply in the group relief rules where a consortium link company is resident in the European Economic Area but outside the UK.
New ‘disguised investment management fee’ rules, announced at the time of the Autumn Statement, are amended in s 21 of the Act. The rules will apply where an individual provides investment management services to a collective investment scheme involving a partnership and will apply to sums arising on or after 6 April 2015.
Where the rules apply, an individual will be treated as receiving disguised fee income where they receive any sum from a collective investment scheme (including a loan or allocation of profit) which is not ‘carry,’ a return or repayment of amounts invested, or a commercial return on amounts invested. The amount will be treated as trading income of the individual where it would not otherwise be taxed either as income from a trade or as employment income (e.g. remuneration via the fund manager vehicle). To the extent that the investment advice is given in the UK, any amounts treated as disguised investment management fees will also be treated as UK source income.
The Act expands the concept of carry; beyond the narrow definition contained in the December draft clauses to include amounts received by way of ‘profit related return.’ However, such amounts will remain taxable as trading income to the extent that there is no ‘significant risk’ of receipt. ‘Significant risk’ is not defined for this purpose and this is likely to be an area where HMRC guidance is key. The Act also includes provisions to allow further amendments to the rules by way of statutory instrument.
The Act includes provisions in Sch 7 to extend the CGT charge to non-UK residents in respect of the disposal of UK residential property with effect from 6 April 2015. The new tax is only intended to apply to gains arising on or after 6 April 2015 and a number of rebasing measures are available for those within the charge whose property was acquired before that date. To the extent that gains on high value residential property are subject to an annual tax on enveloped dwellings (ATED) related capital gain, this will take priority over the new charge. The new charge will, however, take priority over existing anti-avoidance legislation, which attributes gains to UK participators in non-UK resident companies and to settlors and beneficiaries of non-UK resident trusts. It will also take priority over provisions that attribute gains to individuals who return to the UK after a period of non-residence.
The Act includes new provisions for the submission of tax returns covering the charge (NRCGT returns). NRCGT returns must be submitted by the 30th day following completion of the disposal of UK residential property. These must include a calculation of the gain (an ‘advance self-assessment’) unless the taxpayer has received a self-assessment tax return for that year or a previous year or has submitted an ATED return for the preceding chargeable period. Where the NRCGT return includes an advance self-assessment, a payment on account of the tax is due at the same time as the return.
New provisions extend holdover and rollover relief to qualifying disposals of UK residential property in certain circumstances for gains which would otherwise be subject to NRCGT.
The Act contains provisions allowing eligible non-resident companies owning UK residential property to make an irrevocable election to form a pooling group. This enables NRCGT gains and losses made by the members of the group to be pooled, and for intra-group disposals of property to be disregarded.
Non-resident individuals and trustees will pay CGT at the same rates as UK resident individuals and trustees (i.e. 18% and 28%) and companies within the charge will pay tax at 20%.
As expected, the Act also includes changes, in Sch 9, to private residence relief, which provides 100% CGT relief for disposals of an individual’s only or main residence.
With effect from 6 April 2015, it will only be possible to claim private residence relief in a tax year for a property in a country in which an individual (or spouse) is resident, or where the individual (or spouse) spends at least 90 days in that property or other properties in the same jurisdiction. The definition of a day spent at the property (previously a ‘present at midnight test’) has been amended slightly to allow for those who ‘stay overnight’ at the property without being present at midnight. This may still cause problems for shift workers and HMRC guidance is needed on what is meant by an overnight stay. Where an individual qualifies for the relief for part of the period, only part of the gain will be exempt.
For those who are subject to non-UK resident CGT in respect of their disposal, periods prior to 6 April 2015 will not be counted for the purpose of private residence relief unless the individual meets certain conditions and makes an election.
A principal private residence election is still possible but the interaction between making an election and non-resident periods is complex and will need to be reconsidered before any disposal.
The Act contains a number of updates to entrepreneurs’ relief (ER).
Amendments are made to measures announced at Autumn Statement designed to remove ER from sales of goodwill to close companies. Under the amended legislation in s 42, such sales will continue to qualify for the relief where the sale takes place to a close company with which the seller has no connection. These rules, as amended, still apply to disposals on or after 3 December 2014.
Also included in the Act, in s 43, are measures announced at the Budget to restrict the availability of ER for shareholdings in structures involving joint ventures (where the management company is neither a holding company of a trading group nor trading in its own right). ER is also restricted, by s 41, for associated disposals which must now accompany a sale of at least a 5% shareholding in the company or in the assets of the partnership carrying on the business. Legislative clauses to introduce these two restrictions were published at the time of the Budget and apply from 18 March 2015.
As announced at Autumn Statement, there are also measures to allow ER to apply to gains which have been deferred by reinvestment into enterprise investment schemes or social investment tax relief.
New provisions included in the Act build on those made in the Taxation of Pensions Act 2014 in respect of payments of income withdrawal from a drawdown fund on the death of an individual.
The legislation, in Sch 4, sets out when annuities, paid following the death of a pension scheme member, can be paid as an authorised payment to anyone other than a dependent. It also sets out when these payments are taxed against the member’s lifetime allowance.
Changes are then made to ITEPA 2003 to provide an exemption from income tax for annuities payable on the death of a person before age 75 in certain prescribed circumstances.
The changes have effect from 6 April 2015.
The Act includes details of the measure announced in Budget 2015 to ensure that the CGT exemption for certain wasting assets is only available where the assets have been used in the seller’s own business (previously it was possible to loan or rent assets to another business and so qualify for the exemption).
The Act also includes the following provisions that were set out in the December draft Finance Bill clauses:
The employment tax clauses in the Act originate mainly from the chancellor’s announcement, at Budget 2014, of four main measures following the Office of Tax Simplification’s (OTS) review of employee benefits in kind (BiKs) and expenses.
Parliament has decided not to legislate for an exemption for trivial BiKs in FA 2015. This is despite proposals in the Budget of 18 March 2015 for the introduction of anti-avoidance measures to prevent any perceived misuse of the proposed trivial benefit exemption by closely controlled businesses. This means that the draft statutory exemption which would allow employers to identify certain low value BiKs as ‘trivial’ and hence exempt from income tax and NICs, will not come into force from 6 April 2015 as expected. The measure, subject to conditions and as originally drafted, gave scope to provide multiple trivial benefits in a tax year.
As expected, measures are included in the Act, in Sch 1, to amend ITEPA 2003 and abolish the longstanding £8,500 threshold for ‘higher paid employment’ meaning that all employees will be taxed on their BiKs and expenses in the same way. Exemptions have been introduced to mitigate the effects of the abolition of the threshold for BiKs for ministers of religion earning at a rate of less than £8,500 and a further exemption has been introduced for employees who work as caregivers in respect of board and lodging that is provided in the home of the person who they are caring for. The relevant NICs legislation has also been amended to align the NICs and the income tax treatments. These measures will take effect from 6 April 2016.
The measures regarding the proposed exemption for paid or reimbursed expenses have been included in the Act, in s 11, as originally drafted but with some significant amendments. The measures will allow employers to exempt from income tax, expenses payments and BiKs provided to employees where the employee would have been eligible for a deduction had they incurred and paid an amount equal to the expense themselves. The measures also do away with the current system that allows employers to apply to HMRC for a ‘dispensation’ in respect of paid or reimbursed expenses where ultimately there is no liability to tax. The processes outlined in the draft clauses which set out the required approval to pay or reimburse expenses at a flat rate remain unchanged in the Act.
However, the payment or reimbursement cannot be provided as part of ‘relevant salary sacrifice arrangements.’ The definition of such arrangements, whenever made, before or after the employment began, has now been widened from scenarios where an employee simply gives up a right to receive earnings in return for the provision of the benefit, to include scenarios where the amount of earnings received depends on the provision of the benefit.
The measures also now include a targeted anti-avoidance rule. This prevents the exemption from applying to expenses and BiKs which are provided as part of arrangements that reduce the earnings of the employee chargeable to tax and NICs and one of the main purposes of the arrangement is to avoid tax or NICs.
The measures confirm the changes required to abolish the current dispensation regime from 6 April 2016. Parallel changes will also be made to the NICs legislation. However, these measures now include provisions which allow HMRC to revoke a ‘pre-commencement dispensation’ from a date earlier than 6 April 2016. A ‘pre-commencement dispensation’ is one which HMRC has given under existing provisions and is in place immediately before 6 April 2016.
The Act amends ITEPA 2003 to allow HMRC to amend the PAYE regulations to collect income tax on specified BiKs through PAYE with effect from 6 April 2016. The government has decided that, as a first step, a limited number of BiKs can be payrolled; namely those for cars, car fuel medical insurance and gym membership. Once payrolling has been established, the government will consider how other BiKs can be payrolled.
Section 17 of the Act amends existing legislation in TMA 1970. This allows HMRC to issue penalties, without issuing proceedings before the First-tier Tribunal, where the penalty relates to the late filing of, non-submission of or incorrect or incomplete, quarterly returns by employment intermediaries from 6 April 2015. The first of the employment intermediaries information quarterly return is due to be submitted by 5 August 2015.
The draft Finance Bill clauses published in December included indirect tax measures relating to:
These clauses appear largely unchanged in the Act.
As announced in the Budget, the Act also provides for VAT refunds to palliative care charities and medical courier charities in relation to their non-business activities with effect from 1 April 2015.
The Budget measure aimed at UK partly exempt businesses which seeks to restrict the recovery of VAT on overhead costs used to support their foreign branches will be introduced by secondary legislation. The draft legislation was published on 18 March. The new rules will have effect for partial exemption tax years beginning on or after 1 August 2015.
As expected, the Act, in Sch 18, extends the accelerated payments regime to cover circumstances where the company involved in the dispute has surrendered the advantage to another company by way of group relief. This change applies to group relief surrenders whenever they were made, provided that all the necessary requirements for an accelerated payment are met.
This extension of the regime follows the extension of the regime to cover NICs (effective 12 April 2015). Both steps are consistent with Osborne’s Budget promise that more accelerated payment notices will be issued to ‘those who hold out from paying the tax that is owed.’
The following measures were included in the December draft Finance Bill clauses and are largely unchanged:
New measures targeted at serial users of tax avoidance schemes that fail are to be introduced, alongside specific tax geared penalties for cases tackled by the general anti-abuse rule (GAAR), but these measures will be contained in a future Finance Bill.
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