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									                       Monthly Tax Review
                                Matthew Hutton

                           A Periodic Update
                       for Professional Advisers
                                       April 2008
                           (Copy Date 28 March 2008)



Alistair Darling’s first Budget came and went on Wednesday 12 March. The highlight has to be
what tax professionals, if not also their non-UK domiciled clients, will see as a very substantial
climb down on the draft legislation issued on 18 January, especially in relation to the capital
payments regime. To what extent it will be sufficient to stop the anticipated flight of human
capital from the UK remains to be seen: there will no doubt be a certain degree of nervousness
that Pandora’s box has been opened at all, even if not too wide to date.

One other announcement of note was the deferral by a year of the income shifting regime
proposed following last year’s HL decision in favour of the taxpayer in Jones v Garnett. It will be
interesting to see whether this does lead to some sensible consultation before enactment of a
new regime or whether alternatively, because HMRC and the professions are so far apart on
this issue, HMRC’s desires are simply left to wither on the vine: too much to hope for?

Clearly the disclosure regimes are proving their worth for HMRC, as demonstrated by the
various targeted anti-avoidance rules announced in the Budget.

What is regrettable is the vast scope of the Budget notes, some 270 pages, quite apart from
additional releases on specific issues. I pick out for coverage this month those which I consider
likely to be of most interest to MTR delegates: they make for a fairly bulky Issue, I fear.

MTR April does not cover the main Budget 2008 material already announced, eg the
transferable nil-rate band for IHT (see MTR 11/07 Item 2.1), the CGT reform in general (see
MTR 11/07 Item 1.1) and the entrepreneurs’ relief in particular (see MTR 2/08 Item 1.1).

Thursday 27 March saw publication of the Finance Bill.




                                                                                    April 2008
CONTENTS                                                  5.8     Budget 2008: Controlled Foreign Companies
                                                                  (CFC) – Anti-Avoidance
1.    CAPITAL GAINS TAX
                                                          5.9     Budget       2008:     Corporate    Intangible
1.1   Budget 2008 – Residence and Domicile:
                                                                  Assets Regime – Anti-Avoidance
      Aligning the CGT Treatment for Non-UK
                                                          5.10    Budget 2008: Restrictions on Trade Loss
      Resident Trusts
                                                                  Relief for Individuals
1.2   Residence and Domicile Reform: Non-UK
                                                          5.11    Budget 2008: Double Taxation Relief - Income
      Resident Trusts
                                                                  Tax
1.3   Capital Gains Tax Reform – Amended FAQ
                                                          5.12    EIS: Disqualifying Payments – Or Not?
1.4   Terminating a Company: More on ESC 16
1.5   Contribution of Assets to a Partnership:
                                                          6.      EMPLOYMENT
      HMRC’s Practice Revised
                                                          6.1     Budget     2008:    Enterprise  Management
1.6   Trustees: Tax Liability Follows Residence
                                                                  Incentives (EMIs)
                                                          6.2     Beneficial Loan Arrangements – Official Rates
2.    INHERITANCE TAX
                                                          6.3     Expenses Payments to Employees Travelling
2.1   Budget 2008: Pensions Savings and IHT
                                                                  Outside the UK: Scale Rates
2.2   Budget 2008: Transitional Serial Interests
                                                          6.4     Salary Sacrifice
2.3   Excepted Transfers and Settlements
                                                          6.5     PAYE: Changes From April 2008
2.4   Business Property Relief: The Identification
                                                          6.6     PAYE Regulations: Changes Following
      Rules for Shares
                                                                  Demibourne
3.    STAMP TAXES
                                                          7.      NATIONAL INSURANCE
3.1   Budget 2008: Reduction of Stamp Duty
                                                                  No Items to report
      Administrative Burden
3.2   Budget 2008: Relief for New Zero-
                                                          8.      VAT & CUSTOMS DUTIES
      Carbon Flats
                                                          8.1     Budget 2008: Various Changes
3.3   Budget 2008: Notification Thresholds for Land
                                                          8.2     Carousel Fraud: HL Allows HMRC’s Appeal
      Transactions and Rate Thresholds for
                                                          8.3     Transfer of Going Concern Consultation
      Leasehold Property
3.4   Budget 2008: Anti-avoidance      Legislation
                                                          9.      COMPLIANCE
      Affecting Partnerships
                                                          9.1     Filing Returns and Paying Tax Online: New
3.5   Budget 2008: Anti-avoidance
                                                                  Deadlines
3.6   SDLT: Policy and Processing Organisation
      within HMRC
                                                          10.     ADMINISTRATION
3.7   Practitioner’s News Issue 20 – February 2008
                                                          10.1    Budget 2008: Penalties for Incorrect Returns
                                                                  and Failure to Notify a Taxable Activity
4.    PERSONAL INCOME TAX
                                                          10.2    Budget 2008: Compliance Checks
4.1   Budget 2008: The New Statutory Residence
                                                          10.3    Budget 2008: Payment of Tax
      Rule
                                                          10.4    Offshore Disclosure Facility
4.2   Budget      2008:    UK     Resident   Non-UK
      Domiciliaries - Taxation from 2008/09
                                                          11.     EUROPEAN AND INTERNATIONAL
4.3   Residence and Domicile Reform: HMRC’s
                                                          11.1    Agricultural Property Relief: The Impact of the
      FAQs
                                                                  ECJ Decision in Jager
4.4   Residence and Domicile Reform: Non-UK
      Domiciliaries
                                                          12.     RESIDUE
4.5   Budget 2008: Foreign Dividends
                                                          12.1    Budget 2008: Venture Capital Schemes
4.6   Budget 2008: Income of Beneficiaries Under
                                                          12.2    Budget 2008: Investment Manager Exemption
      Settlor-Interested Trusts
                                                                  (IME)
4.7   Budget 2008: Gift Aid – Transitional Relief
                                                          12.3    Budget 2008: Offshore Funds –
                                                                  New Tax Regime
5.    BUSINESS TAX
                                                          12.4    Budget 2008: Authorised Investment Funds
5.1   Budget 2008: Corporation Tax Rates
                                                          12.5    Budget 2008: Double Taxation Treaty Abuse
5.2   Budget       2008:        Research       and
                                                          12.6    Budget 2008: Power to Give Statutory Effect
      Development Tax Relief
                                                                  to Existing Concessions
5.3   Budget 2008: Capital Allowances
                                                          12.7    Chattels Valuation: HMRC’s Fiscal Forum
5.4   Budget 2008: 100% First Year Allowances for
                                                          12.8    Tax Law Rewrite Project
      Expenditure on Cars with Low Carbon Dioxide
                                                          12.9    UK Regional Trade Estimates for 2007
      Emissions
                                                          12.10   Equitable Jurisdiction and Mistakes
5.5   Budget 2008: Trading Stock
                                                          12.11   Letters of Wishes: The Issue of Confidentiality
5.6   Budget 2008: Leased Plant or Machinery –
                                                          12.12   Money Laundering Regulations: Registration
      Anti-avoidance
                                                                  Deadline Extended
5.7   Budget 2008: Financial Products Avoidance –
      Disguised Interest and Transferring Rights to
                                                                  APPENDIX
      Lease Rentals




                                                      1                                               April 2008
1.      CAPITAL GAINS TAX                                       (c) Surplus capital payments brought forward from
                                                                2007/08 will not be taxed unless (as now) the non-
                                                                UK domiciled beneficiary is both resident and
1.1     Budget 2008 – Residence and                             domiciled in the UK when trust gains are treated as
        Domicile: Aligning the CGT                              accruing to him. (This treatment will apply whether or
        Treatment for Non-UK Resident                           not the non-UK domiciled beneficiary is a remittance
        Trusts                                                  basis user in the year when trust gains are treated
                                                                as accruing to him.) Surplus capital payments to
Overview                                                        non-UK domiciled beneficiaries made prior to
The Budget made very substantial changes to the                 12.3.08 can be franked against future post-5.4.08
draft legislation issued on 18.1.08, which may be               trust gains, although only to the extent that there are
summarised as follows:                                          no capital payments made after 5.4.08 to which the
                                                                post-5.4.08 gains can be attributed first and there
     The s86 settlor charge remains restricted to
                                                                are no pre-6.4.08 gains accruing by virtue of the
         UK domiciled settlors.
                                                                rebasing election.
     The capital payments charge under s87 will
         apply to all beneficiaries wherever domiciled,
                                                                (d) Capital payments made to non-UK domiciled
         including the settlor.
                                                                beneficiaries between 12.3.08 and 5.4.08 which are
     A non-UK domiciled beneficiary who claims                 not matched to pre-6.4.08 gains will be left out of
         the remittance basis will be liable to CGT             account in 2008/09 and subsequent years for the
         only for a capital payment remitted to, or a           purposes of s87.
         benefit received in, the UK.
     Capital payments made to non-UK                           (e) Trust gains brought forward from 2007/08 and
         domiciliaries before 6.4.08 will not be taxed          treated under s87(4) as accruing to non-UK
         where matched with post-5.4.08 gains and               domiciled beneficiaries by virtue of capital payments
         irrespective of a remittance basis claim.              made on or after 6.4.08 will not be taxed unless the
     Non-UK domiciliaries will not be taxed on                 non-UK domiciled beneficiary has become both
         capital payments after 5.4.08 where                    resident and domiciled in the UK. Although the
         matched with pre-6.4.08 gains, whether or              capital payment is received after 5.4.08, if it is
         not the remittance basis is claimed.                   matched to trust gains realised prior to 6.4.08 or to
     Trustees will have an option to rebase                    the pre-6.4.08 element of any gain on a rebasing
         assets within trusts and certain underlying            election, it is not necessary in this case for the non-
         companies as at 5.4.08.                                UK domiciled beneficiary to be a remittance basis
     Transitional rules will apply to payments                 user.
         made between 12.3.08 and 5.4.08.
                                                                (f) Trusts which are non-UK resident on 6.4.08 will
Changes                                                         have the option to elect for rebasing to market value
                                                                as at 6.4.08 in relation to all assets held by the trust
Capital payments                                                both directly and by its underlying companies. The
(a) Capital payments made from 6.4.08 to non-UK                 effect is that the pre-6.4.08 element of any trust
domiciled beneficiaries will generally be chargeable            gains treated as accruing to non-UK domiciled
to tax.                                                         beneficiaries after that date will not be taxed. This
                                                                right of election is described further below.
(b) The remittance basis will apply if the non-UK
domiciled beneficiary is a ‘remittance basis user’ (ie          (g) Any supplemental charge under s91 for
where he has claimed the remittance basis under                 remittance basis users will be calculated based on
new ITA 2007 s809B or is entitled to it under new               the year in which the capital payment is made by the
s809C) in the year when trust gains are treated as              trustees, not the year in which it is remitted to the UK
accruing to him. This will be so whether the trust              by the non-UK domiciled beneficiary.
gains accrue on UK or on non-UK assets. A capital
distribution will be treated as remitted if the                 (h) A general matching rule will be introduced to the
distributed property is received in or brought to the           effect that a last in, first out rule (LIFO) will be used
UK. Benefits-in-kind will be treated as remitted if             to match any trust gains with capital payments made
enjoyed or used in the UK.                                      on or after 6.4.08. This will apply to all beneficiaries,
                                                                not just non-UK domiciled beneficiaries, and will
The new legislation will not change the tax position            apply in place of the present first in, first out (FIFO)
of non-UK domiciled beneficiaries who receive                   rule in computing the supplementary charge. It is
capital payments on or before 5.4.08 and will not tax           thought that this will generally be advantageous to
non-UK domiciled beneficiaries on future capital                UK domiciled beneficiaries.
payments where these are matched to trust gains
realised prior to 6.4.08. This will be so irrespective of       Capital payments made before 6.4.08 will be dealt
whether the non-UK domiciled beneficiary is a                   with as set out below. When a capital payment is
remittance basis user.                                          made on or after 6.4.08:


                                                            2                                                 April 2008
       trust gains of the current year will be treated              a capital payment is made to any beneficiary
        as accruing to the beneficiary before gains                   (or person treated as a beneficiary) who is
        of previous years, and trust gains of later                   UK resident; or
        previous years before those of earlier                       a part of the trust fund which is less than the
        previous years; and                                           whole is transferred after 5.4.08 to a new
       current year capital payments will be                         settlement in circumstances where s90
        matched with trust gains before capital                       applies.
        payments of previous years and capital
        payments of later previous years before               The election will not in itself trigger any deemed
        those of earlier previous years.                      disposal. The one limited purpose of the election
                                                              is simply that, when there is a later actual
The result is that:                                           disposal of the asset, the trust gains realised on
       (i) remittance basis users will be taxable on          that disposal will be split between the pre-6.4.08
       a remittance basis on trust gains accruing to          and post-5.4.08 elements. Non-UK domiciled
       them under s87(4) if and to the extent that            beneficiaries will not be taxed insofar as any
       the trust gains and the capital payments               capital payments are matched to the pre 6.4.08
       relate to the period after 5.4.08. If they are         element of gain. So there will still be one trust
       not remittance basis users, they will be               pool but trustees will need to keep a record of
       taxed on an arising basis;                             pre-6.4.08 and post-5.4.08 gains for the purposes
                                                              of being able to tell non-UK domiciled
        (ii) gains accruing under s87(4) will only be         beneficiaries whether they are taxable.
        free of tax to non-UK domiciled beneficiaries
        to the extent that there are no post-5.4.08           The availability of any reliefs on the disposal (such
        trust gains or no post-5.4.08 capital                 as main residence relief) will be given by reference
        payments.                                             to the rules prevailing at the date of the actual
                                                              disposal not the position on 6.4.08. Where the gain
No additional notification requirements will be               on an actual disposal is reduced by a relief, the relief
imposed on non-UK domiciled settlors of non-UK                will be apportioned pro rata between the pre-6.4.08
resident trusts and there will be no change to the            and post-5.4.08 elements of gain.
existing provisions of TCGA 1992 Sch 5A.
                                                              The election will have no impact on the calculation of
As now, there will be no charge to tax on capital             the supplemental charge under s91 nor will it
payments to non-UK resident beneficiaries, although           accelerate any charge under s86 on a UK domiciled
capital payments made on or after 6.4.08 will be              and resident settlor. This is because the election will
matched to trust gains in the same order as for other         not alter the fact that the entire gain continues to be
beneficiaries (LIFO).                                         treated for all purposes as having arisen only on the
                                                              date of actual disposal, even if part of the gain is
These changes apply to company gains apportioned              allocated to the pre-6.4.08 pool for the purposes of
to non-UK resident trusts under s13(10), but do not           determining whether a non-UK domiciled beneficiary
apply to the gains of non-UK resident companies               is taxable under s87.
apportioned to UK resident and non-UK domiciled
individual participators.                                     Where a capital payment made after 5.4.08 is less
                                                              than the trust gains, the LIFO rule will mean that the
Rebasing                                                      gains of later years will be treated as accruing to the
The trustees of any trust which is non-UK resident as         beneficiary before the gains of earlier years. Where
at 6.4.08, whatever the domicile of the settlor, will         a rebasing election has been made by the trustees,
have the right to elect that, for one limited purpose,        the post-5.4.08 element of the trust gains of a given
the following will be deemed to have been                     year will be treated as accruing before the pre-6.4.08
reacquired at market value on 6.4.08:                         element in respect of capital payments made on or
(a)     assets owned by the trust on 6.4.08;                  after 6.4.08.
(b)     assets owned by an underlying company on
        6.4.08, insofar as                                    Making a rebasing election will entail an
        (i) on the disposal of any such asset the gain        exception to the normal LIFO rule. Where surplus
        (if any) is apportionable to the trust under          capital payments are brought forward from 2007/08
        s13(10), and                                          and made prior to 12.3.08, they will be matched to
        (ii) it would have been so apportionable if in        gains treated as accruing before 6.4.08 on any
        fact realised on 6.4.08.                              rebasing election before being matched with gains
                                                              deemed to accrue from 6.4.08.
The election will not be made on an asset by asset
basis but, once made, will apply to all assets of the         Surplus capital payments made to non-UK domiciled
trust and any underlying companies.                           beneficiaries between 12.3.08 and 5.4.08 will be
The election will be irrevocable and must be made             matched to gains treated as accruing before 6.4.08
on or before 31 January following the tax year in             on a rebasing election, but will not be matched to
which the first of the following occurs:                      post-5.4.08 trust gains.
                                                          3                                                April 2008
                                                                          accrued before 6.4.08 and is treated as
Since any gain resulting from a rebasing election will                    accruing to a non-UK domiciled beneficiary.
not be brought into account on 6.4.08 but only when               (c)     Any rebasing election made by the trustees
the asset is disposed of, the notional pool of pre-                       will apply to OIGs in the same way as to
6.4.08 gains will fluctuate in the future because:                        ordinary capital gains.
                                                                  (d)     The transitional rule applicable to capital
      (a)       when assets owned on 6.4.08 are                           payments made between 12.3.08 and 5.4.08
                disposed of at a gain, the pool of pre-                   will apply.
                6.4.08 gains will increase; and
      (b)       capital payments will reduce the pre-             There will be no change in the current law whereby
                6.4.08 pool to the extent that there are          OIGs are taxed at the rates applicable to income.
                no post-5.4.08 gains to which the                 Thus, despite the fact that OIGs may be treated as
                payment can be allocated in that year.            accruing to beneficiaries in accordance with s87, the
                                                                  applicable tax will be income tax not CGT.
Offshore income gains (OIGs)
Under current law, OIGs accruing to non-UK resident               TCGA 1992 Sch 4C (transfers between trusts)
trusts are taxed by a mixture of s87 and the transfer             Sch 4C applies in place of s87 where a transfer of
of assets code now in ITA 2007 ss714 - 751. This is               value between trusts has occurred within Sch 4B.
provided for by TA 1988 s762(2)-(6), which apply                  Currently, capital payments to non-UK domiciled
also to OIGs apportioned to non-UK resident trusts                beneficiaries are not taken into account under Sch
from non-UK resident companies which would be                     4C and so are not taxed.
close were they to be UK resident.
                                                                  The proposed changes to Sch 4C are as follows:
TA 1988 s762(2)-(6) will apply to OIGs realised on or             (a)    There will be no changes as respects Sch
after 6.4.08 as follows:                                                 4C pools existing as at 5.4.08.
                                                                  (b)    A Sch 4B transfer on or after 6.4.08 will
(a)         If and insofar as an OIG realised on or after                result in a separate Sch 4C pool.
            6.4.08 is not treated under s87 as applied by         (c)    Gains in Sch 4C pools coming into existence
            s762(2) as an OIG accruing to a UK resident                  on or after 6.4.08 will be able to be matched
            in the tax year when it is realised (because it              with capital payments to non-UK domiciled
            cannot be matched with a capital payment                     beneficiaries. But this will be subject to
            made in that or earlier years), it will become               similar transitional rules as apply to s87 and
            income for the purposes of the transfer of                   the remittance basis will apply to remittance
            assets code (ie ITA 2007 ss720-730 and                       basis users.
            ss731-735 will apply).
                                                                  (Separate HMRC Budget Note 12.3.08, Residence
(b)         Once an OIG has become income for the                 and Domicile: Aligning the Capital Gains Tax
            purposes of the transfer of assets code, it           Treatment for Non-UK Resident Trusts’)
            will be removed permanently from the s762/
            s87 pool and will be deemed to be relevant            HMRC’s FAQs
            foreign income, so any OIG will not be                An extensive revised set of FAQs was issued on
            subject to double taxation.                           17.3.08 (see Item 4.3 below).

(c)         Where, in the year in which the OIG                   1.2     Residence and Domicile Reform:
            accrues, the transfer of assets code is                       Non-UK Resident Trusts
            disapplied by the motive defence in ITA
            2007 ss736-742, the OIG will remain in the
            s87 OIG pool and will continue to be dealt            Context
            with by s87 as applied by TA 1988 s762(2)-            Members of the STEP Technical Committee
            (4).                                                  attended a meeting with HMRC on 20.3.08 at which
                                                                  HMRC responded to some of the questions which
The changes described in the previous paragraph                   had been raised following the Budget in relation to
will apply in taxing beneficiaries and transferors who            the new rules on trusts and the taxation of non-
are resident and domiciled in the UK as well as in                domiciliaries.
taxing non-UK domiciled individuals.
                                                                  STEP’s understanding of several important
OIGs treated in accordance with the above rule as                 points which were made at that meeting
gains accruing to a non-UK domiciled beneficiary                  1.      The Finance Bill will be published on 27
under s87 will be treated in the same way as                      March, but it will contain several provisions in
ordinary capital gains. Inter alia this means:                    relation to non-resident trusts/non-domiciliaries
(a)     The remittance basis will apply if the                    which HMRC already know will need to be amended
        beneficiary is a remittance basis user.                   before the Bill receives Royal Assent.
(b)     Tax will not be charged insofar as the capital
        payment was made before 6.4.08 or the OIG                 2.      In relation to the matching of gains with
                                                                  capital payments made between 12 March and 5
                                                              4                                           April 2008
April this year, the provisions which will be enacted         counteraction considered either for the original
will not be the same as those outlined in paras 11(d)         transactions or for the combined effects of the
and 24 of the paper ‘Residence and domicile:                  original and additional transactions.
aligning the CGT treatment of non-UK resident
trusts’ which was issued on Budget Day. Surplus               In the circumstances described in the question
capital payments made between 12 March and 5                  above, we will not normally refuse clearance for
April will not be matched with the pre-6 April 2008           disposals of loan notes, issued in a transaction for
element of rebased gains.                                     which we originally gave clearance before October
                                                              2007, if those disposals:
3.       The LIFO basis will be applied by reference              1. do not provide any additional opportunity to
to the trust gains of a particular year and those gains                take consideration in a form free of income
are to be pro-rated between the beneficiaries who                      tax (even if they result in consideration being
receive capital payments in that year.                                 received earlier); and
                                                                  2. are in essence motivated by a desire to take
4.      When assets are transferred between trusts,                    advantage of the current (pre-6 April 2008)
the recipient trust receives a pro-rata amount of the                  CGT rules; and
gains in the gains pool of the original trust (trust              3. take place between 9 October 2007 and 5
gains will not be allocated on a LIFO basis for this                   April 2008.
purpose).
                                                              The sale of loan notes to a company controlled by
5.      It will not be possible to make rebasing              the vendor is an example of a disposal that may fail
elections in relation to TCGA 1992 s13 companies              to meet 1. above, as it may give the vendor the
owned by individuals.                                         opportunity to receive consideration in a form free of
                                                              income tax that could have been paid as a dividend
(Release by STEP’s UK Technical Committee                     by the holding company.
26.3.08)
                                                              Where greater certainty is required, we will be happy
1.3     Capital Gains           Tax     Reform       –        to consider a revised clearance application under
                                                              s701 (or s707) including particulars of all the
        Amended FAQ                                           transactions. Applicants are reminded, however, that
                                                              February/March is always a popular time for making
HMRC have published a slightly amended FAQ                    clearance applications (and especially this year), so
relating to CGT reform and clearance under ITA                it is particularly important to apply in good time.
2007 s701 [transactions in securities], as set out
below.                                                        (HMRC press release 17.3.08)
Q. What will HMRC consider reasonable
rearranging of affairs where a clearance has
                                                              1.4     Terminating a Company: More on
been given under ITA 2007 s701 (or TA 1988                            ESC 16
s707)?
                                                              Context
A. A clearance under s701 (or s707) confirms that             In many cases minds will have been turning to
HMRC are satisfied that no counteraction should be            whether now is a good time to bring the life of a
taken under s698 (or s703) about the transactions in          company to an end either because of a desire to
                                                                                    —


securities that are described in the application for          capitalise on taper relief while it lasts, or because of
clearance.                                                    the new legislation on income-shifting [deferred to
                                                              2009/10]. Or perhaps for both reasons.
The provisions in ITA 2007 part 13 ch 1 are
concerned with income tax but not CGT (and since 6            Most advisers will be familiar with Extra-Statutory
April 2007 TA 1988 part 17 ch 1 is concerned only             Concession (ESC) C16. This is the concession
with corporation tax).                                        under which HMRC agree, in effect, to pretend that a
                                                              liquidator has been appointed to a company so that
No-one is required to apply for clearance, but we             what are in law dividends subject to income tax will
receive thousands of clearance applications each              instead be subject to CGT. ESC C16 saves the cost
year from people who value the certainty it provides.         and complexity of a formal liquidation and is
The clearance we give relates only to the                     sometimes wholly inaccurately referred to as the
                                                                          —                      —


transactions described to us in the application.              ‘informal liquidation’ route. See MTR 10/06 Item
                                                              12.1 and 7/07 Item 12.5.
It is not possible to give a blanket statement of the
view we will take where additional transactions not           Further information required by HMRC
covered by the clearance are effected in order to             ESC C16 will be applied only if certain undertakings
take advantage of the current CGT rules. It will be a         are given to HMRC in advance. These are set out in
matter for judgment, in the light of the facts and            the concession itself. However, Berg Kaprow Lewis
circumstances of the particular case, whether the             are finding that before sanctioning ESC C16,
clearance given needs to be revisited and                     HMRC are now routinely seeking two additional
                                                          5                                                April 2008
undertakings not set out in the concession.                  willingness to accept a ‘practice prevailing’ type of
These are to the effect that:                                argument to preclude any recast. It is impossible to
  •    the company will not transfer or sell its             say how local inspectors will react to this clarification
  assets or business to another company                      in treatment as it filters through HMRC, so we can
  having some or all of the same shareholders;               only hope that they take a sensible approach.
  and
                                                             The technical position is also not free from doubt
   •   the arrangement is not a reconstruction               with arguments possible under the Booth and
   in which some or all of the shareholders in               Jenkins cases. No doubt this will be explored further
   the original company retain an interest in the            as HMRC’s approach becomes better known and
   second company.                                           real cases along the lines of A and B in the Example
                                                             below emerge.
These additional requirements seem to be directed
to ensure that ESC C16 is not applied in the case of         Example
‘phoenix’ companies where a counter-action notice            A partnership is formed between partner A and
under ITA 2007 s698 might otherwise be considered,           partner B. Partner A contributes assets with a
nor to reconstructions where no gain would normally          market value of £60 million to the partnership and
be recognised. But, whatever the reason for these            partner B contributes assets worth £40 million. The
additional undertakings, the point of this note is to        profit sharing ratio is set at 60:40 in line with the
suggest that it will now be sensible to include              value of the assets credited to each partner’s capital
these additional undertakings in the initial                 account. The original base costs of the assets
application for ESC C16 treatment.                           contributed by partner A and B respectively were
                                                             £30 million and £10 million.
(TAXline March 2008 – Issue 3 Contribution by
David Whiscombe, writing in Brass Tax, published             Based on previous understanding of HMRC’s
by Berg Kaprow Lewis LLP)                                    interpretation of the law, there would be no capital
                                                             gain arising on either partner on the contribution of
1.5     Contribution        of Assets to a                   the assets. The partner’s capital accounts would be
        Partnership:        HMRC’s Practice                  credited with the market value of the assets
                                                             contributed.
        Revised
                                                             However, based on HMRC’s confirmed view in Brief
Context: Looking ahead
                                                             03/08, partners A and B would each have triggered a
Further to MTR 2/08 Item 1.2 an article in Taxation
                                                             disposal on their contributions, with the disposal
comments on HMRC’s new approach. HMRC’s Brief
                                                             consideration being the fractional share of the value
gives a clear view on how they will treat partnership
                                                             of the asset passing to the other partner. The gains
asset contributions for CGT purposes.
                                                             arising will be calculated as follows:
For taxpayers seeking to use partnerships in future,
                                                             Partner A:
the position is clear. However, such a significant
                                                             Deemed proceeds (£60m x 40%)               £24m
change is likely to have a major commercial impact
                                                             Base cost £30m x 40%                       £12m
on the use of partnerships in future cases where
                                                             Gain chargeable to partner A               £12m
asset contributions are the principal method of
formation. It is understood that publicly available
                                                             Partner B:
property funds have been formed which are
                                                             Deemed proceeds (£40m x 60%)               £24m
reliant on HMRC’s previously held view as
                                                             Base cost £10m x 60%                       £ 6m
expressed in their prospectuses.
                                                             Gain chargeable to partner B               £18m
A blast from the past?
                                                             In order to mitigate the tax arising on the contribution
For taxpayers who have already undertaken
                                                             of these assets, they would need to be contributed in
transactions and have placed reliance on previous
                                                             at historic book values, although in the above
HMRC practice, the position is far from clear. If they
                                                             example the partnership profit ratio would change to
have had specific clearance on the issue from
                                                             75:25 which may not reflect the commercial deal
HMRC, PWC have been assured that HMRC will be
                                                             struck between the partners, and so some tax
bound in those cases.
                                                             leakage would need to arise if the 60:40 ratio was to
                                                             be respected.
But in the (no doubt much more common) situation
where a transaction was carried out and the advisers
                                                             (Taxation 6.3.08 p230, article by Alex Henderson
followed accepted practice based on the general
                                                             and Judith Wilson of PricewaterhouseCoopers LLP)
understanding of SP D12, the position is less clear.
HMRC have said they will not be bound by
statements made previously by their officers. HMRC
have confirmed orally that there is no apparent
intention to reopen old years, but open years are
vulnerable to reappraisal by HMRC. There seems no
                                                         6                                                 April 2008
1.6     Trustees: Tax Liability Follows                     not currently have effect for schemes where there
        Residence                                           are 20 or more members and all members have their
                                                            rights increased at the same rate. A change to the
                                                            draft legislation published at PBR will ensure that the
Smallwood v HMRC: the facts and the decision                unauthorised payment charges and the IHT
In 1989 Mr Smallwood had established a trust, over          liability will not have effect so long as there are
which he had the power to appoint new trustees. The         at least 20 scheme members, who have their
trust assets included shares which had increased in         rights increased at the same rate because
value. From 1994 to December 2000 a Jersey                  another member has died. This will have effect in
company acted as the trustee. In December 2000 Mr           relation to a member who dies on or after 6.4.08.
Smallwood appointed a Mauritius company as the
new trustee. In January 2001 the trustees sold the          FB 2008 will also provide that an IHT charge will
shares at a gain of more than £2,000,000. In March          arise as a result of an unauthorised lump sum
2001 Mr Smallwood appointed himself and his wife            payment in respect of a pension scheme member
(both resident in the UK) as trustees.                      who dies aged 75 or older and who was in
                                                            receipt of an annuity or scheme pension. Any
The Revenue began enquiries, and issued closure             IHT nil-rate band which has not already been set
notices to Mr Smallwood and the trust, amending the         against the estate of the deceased may be set
relevant returns on the basis that Mr Smallwood had         against this IHT charge. A change will be made to
made a chargeable gain of more than £6,800,000,             the draft legislation published at PBR to provide for
and was liable to pay CGT of more than £2,700,000           the situation where the estate has not used all of the
under TCGA 1992 s77(1). Mr Smallwood and the                nil-rate band and more than one of the IHT charges
trustees appealed, contending that at the time the          in respect of a scheme pension or an annuity arises.
shares were sold, the trust had been resident in            This will ensure that the remaining nil-rate band can
Mauritius and the effect of the UK/Mauritius Double         be used only once against the IHT charges. The
Taxation Agreement was that the gains were not              measure, including this change, will have effect
taxable in the UK.                                          when the member dies on or after 6.4.08.
The Special Commissioners rejected the taxpayers’           IHTA 1984 ss151A to 151C give effect to similar
contention and dismissed the appeals, holding on            provisions on ‘alternatively secured pension’ (ASP)
the evidence that ‘domestic law chargeability for the       funds to those set out above. Again, any nil-rate
whole tax year results in Treaty residence                  band that has not been set against the estate may
throughout the tax year regardless of whether that          be set against the IHT charges on ASP funds. To
chargeability was caused by residing in a later part        bring these provisions into line with those for scheme
of the tax year’. Accordingly the trust had not been        pensions and annuities, FB 2008 will ensure that any
solely resident in Mauritius. On the evidence, its          remaining nil-rate band may be used only once
‘place of effective management’ had been in the UK,         against the IHT charges arising on ASP funds. This
so that the gain was taxable in the UK.                     change will have effect when a member dies on or
                                                            after 6.4.08.
(Smallwood v HMRC, SpC 669 27.2.08, reported at
The Tax Journal 3.3.08 p4)                                  Inheritance tax on overseas pension schemes
                                                            PBR Note 14 sets out details of changes which will
                                                            be made to restore IHT protection to UK tax-relieved
2.      INHERITANCE TAX                                     pension savings in overseas pension schemes. The
                                                            provisions in FB 2008 will give IHT protection to
                                                            pension savings which have had UK tax relief and
2.1     Budget 2008: Pensions Savings                       also to all savings in certain overseas pension
        and IHT                                             schemes. The IHT protection will apply to funds in
                                                            overseas pension schemes which are tax-
Context                                                     recognised and regulated in the country in which
Various changes were announced at the PBR on 9              they are established. Or, if there is no system for tax
October 2007 (see MTR 11/07 Item 2.2). These                recognition or regulation in that country, then the
measures will be reflected in FB 2008 along with            funds must be used to provide a pension income for
other changes.                                              life.

Inheriting tax-relieved pension savings                     The change to the IHT rules for overseas pension
FB 2008 will include provisions to implement the            schemes will have effect on or after 6.4.06.
proposals on scheme pensions and annuities.
Details of this are set out in PBR Note 15 and the          (HMRC Budget release BN45 13.3.08)
subsequent changes are set out below.

The rules preventing unused tax-relieved funds
being passed as increased pensions after death to
other family members, other than dependants, do
                                                        7                                               April 2008
2.2     Budget 2008: Transitional Serial                       The purpose of the second test is to make it a
        Interests                                              requirement to deliver an account where the value
                                                               transferred by the transfer of value, or in which the
                                                               interest in possession subsists, exceeds the NRB
Context                                                        which is available to the transferor – but the
The practical implications of IHTA 1984 s53(2A)                chargeable transfer that emerges remains below the
introduced by FA 2006 have caused concern ever                 NRB due to exemptions or relief. And in this
since the end of August (see MTR 10/07 item 2.1).              connection, agricultural property relief (APR) and
Happily, the provision is to be interpreted as the             business property relief (BPR) are specifically
professions generally had suggested, and not as                excluded in establishing the chargeable transfer.
proposed by HMRC. In addition, the transitional
period for TSIs is to be extended by six months to             Example
5.10.08.                                                       The transferor creates a relevant property trust in
                                                               favour of his daughter in May 2007 and transfers
Clarifying the effect of a TSI for a single                    £200,000 cash to the trustees. No annual
beneficiary                                                    exemptions are available. This is an excepted
The effect of the transitional provisions is unclear           transfer as the value transferred is attributable to
where pre-22 March 2006 IIP trusts are replaced                cash and is below the NRB.
with a transitional serial interest as defined in IHTA
1984 ss49C, D and E for the same beneficiary. This             Later in August he invests £70,000 in a discounted
measure will ensure that the new rules will not have           gift product and transfers the policy to the trustees.
effect where this kind of change is made in the                Due to his age and the income withdrawals, the
transitional period.                                           value transferred is quantified at £40,000. This too is
                                                               an excepted transfer because, although this second
The legislation will also ensure that the new rules will       disposal is not of cash, the cumulative total of
have effect as intended where an IIP trust is                  chargeable transfers does not exceed 80% of the
replaced after the transitional period with a new IIP          NRB.
trust for either the same or a different beneficiary.
                                                               Then in January 2008, he gives the trustees some
In addition, this measure extends the transitional             shares in the family company where the loss to his
period so that it will now end on 5 October 2008.              estate is £100,000, but which qualify for 100%
                                                               business relief. This is not an excepted transfer
(HMRC Budget release BN46 13.3.08)                             because although the cumulative total of chargeable
                                                               transfers remains at 80% of the NRB, the availability
2.3     Excepted             Transfers            and          of BPR (and APR) is ignored for the purpose of
        Settlements                                            applying these regulations. Thus the unreduced
                                                               value transferred by the transfer of value (£100,000)
Context                                                        exceeds the NRB available to the transferor of
Further to MTR 3/08 Item 2.2, HMRC have published              £300,000 – (£200,000 + £40,000) = £60,000. An
draft guidance as IHTM 06100 - 06130. An extract               account is therefore required.
is set out below.
                                                               (HMRC What’s New? 7.3.08)
IHTM06104 Excepted transfers and terminations:
value transferred attributable to property other               2.4     Business Property Relief: The
than cash or quoted shares or securities                               Identification Rules for Shares
Where the property given away, or in which the
interest subsists, is wholly or partly attributable to         Context
property other than cash or quoted stocks and                  The issue in this case was whether the whole or part
securities, the disposal must pass two tests.                  of the relevant shares resulted from a reorganisation
                                                               of W Ltd’s share capital so that those shares could
First, the value transferred by the chargeable                 be identified with shares owned by the deceased
transfer [IHTM04027] concerned together with the               before the acquisition.
cumulative total of all chargeable transfers made by
the transferor in the seven years before the transfer          Vinton and another (executors of Dugan-
must not exceed 80% of the relevant IHT nil-rate               Chapman) v HMRC: the facts
band (NRB).                                                    Ms Dugan-Chapman was allotted 1 million shares in
                                                               a company (W Ltd) two days before her death. When
And second, the value transferred by the transfer of           she died, there was a charge to IHT as if she had,
value [IHTM04024] giving rise to the chargeable                immediately before her death, made a transfer of
transfer concerned must not exceed the NRB which               value. The value transferred was equal to the value
is available to the transferor at the time the disposal        of her estate at that time which included shares in W
takes place.                                                   Ltd. If those shares (or any of them) were relevant
                                                               business property then the value transferred as a
                                                               result of her death would be reduced, as would the
                                                           8                                               April 2008
IHT payable. The reduction in the value transferred           have been a reorganisation if Ms Dugan-Chapman
was BPR. The conditions for the relief were                   had simply subscribed for shares. They put forward
contained in IHTA 1984 Pt V Ch 1.                             two possible positions. First, there was a larger
                                                              reorganisation, involving 2,261,794 shares, in which
IHTA 1984 s107(4) made reference to s105(1)(bb);              Ms Dugan-Chapman alone effectively participated
s105(1)(a) to (e) inclusive contained the meaning of          and to the limited extent of 1 million shares which
‘relevant business property’ and (bb) provided that           represented that number of the total of 2,261,794
any unquoted shares in a company were amongst                 which were proportionate to her original holding. If
the assets that could be considered as relevant               that was the case, then 1 million shares attracted
business property because the whole of s105(1) was            BPR. Alternatively, there was a rights issue totalling
subject to the conditions contained in the rest of            1 million shares all of which were taken up by the
s105, in s106 (the two-year ownership requirement)            deceased, but she acquired a substantial portion of
and ss108, 112(3) and 113. By virtue of IHTA 1984             the shares by reference to existing holdings.
s107(4), the shares in question would satisfy the
two-year ownership requirement and qualify for BPR            Judith Powell had no hesitation in rejecting the first
for IHT purposes only if they could be identified with        possibility. There was no evidence of any larger
shares already owned by Ms Dugan-Chapman at                   reorganisation of which the issue of 1 million shares
least two years before she died.                              to Ms Dugan-Chapman as a part. As to the second
                                                              possibility, there was confusion about the effect of
HMRC contended that there was a simple                        the rights issue throughout the process. Although
subscription by Ms Dugan-Chapman which was not                those involved hoped that the rights issue and the
a reorganisation and that the principle established in        allotment would have IHT advantages, it was not
Re Duomatic Ltd [1969] 2 Ch 365 (that where all               clear that they were clear about the exact nature of
shareholders of a company who were entitled to vote           the advantages and the effect of the rights issue.
on a matter actually agreed to a particular decision,         Moreover, the allotments were thought commercially
the decision was binding and effective without a              desirable and also supported the IHT position by
meeting) could not apply to re-write a transaction            showing that W Ltd was conducting a business. That
that did not occur. The executors argued that it had          had nothing to do with securing BPR for new shares.
been intended that the whole or part of the shares            Finally, it could not be said that the members
should be treated as allotted to Ms Dugan-Chapman             understood the relevant facts so as to permit
in the course of a reorganisation and should be               application of the Duomatic principle.
identified with her pre-existing holding so that some         (Vinton and Another (executors of Dugan-Chapman)
part of the new shares qualified for relief.                  v HMRC Commissioners SpC 666 7.2.08 reported at
                                                              CCH Weekly Tax News Issue 490 10.3.08 p181)
The decision: SpC (Judith Powell)
BPR was not available in respect of shares
allotted to Ms Dugan-Chapman two days before
her death which could not be identified with any              3.      STAMP TAXES
of her pre-existing shares for the purposes of
IHTA 1984 s107(4).                                            3.1     Budget 2008: Reduction of Stamp
                                                                      Duty Administrative Burden
S107(4) allowed property to be treated as satisfying
the two-year ownership condition if it could be
identified with property which satisfied the condition        FB 2008 will provide that instruments transferring
under any of the provisions of TCGA 1992 ss126–               stocks and shares which were previously
136.                                                          chargeable with £5 Stamp Duty, whether fixed or
                                                              ad valorem, will in future be exempt and will not
The phrase ‘reorganisation of a company’s share               need to be presented to HMRC for stamping.
capital’ was not a term of art but derived colour from
its context. An increase of share capital could be a          (HMRC Budget release BN55 13.3.08)
reorganisation of that capital, notwithstanding that it
did not come within the precise wording of                    3.2     Budget 2008: Relief for New Zero-
s126(2)(a), provided that the new shares were                         Carbon Flats
acquired by existing shareholders and in proportion
to their existing beneficial holdings. It was not             FA 2007 s19 introduced regulation-making powers
obvious from the documentation signed in                      bringing a new relief to provide for zero-carbon
connection with the acquisition in issue that there           homes.
was a rights issue or any acquisition by the
deceased as existing shareholder in proportion to             Qualifying criteria for the relief are set out in the
her existing holding (Dunstan v Young Austen &                Stamp Duty Land Tax (Zero-Carbon Homes Relief)
Young Ltd [1989] BTC 77 considered).                          Regulations 2007 (SI 2007/3437) and require the
                                                              level of carbon emissions from energy use in the
The executors had argued that there was a                     home to be zero over the course of a year. As with
reorganisation. They accepted that there would not            other homes, the vendor of a new zero-carbon flat
                                                          9                                              April 2008
should provide a certificate confirming that it qualifies         Notification threshold raised to £40,000
for the relief.                                                   This measure will raise the current threshold for
                                                                  notification of non-leasehold transactions from
The relief will be eligible only to new flats which               chargeable consideration of £1,000 to £40,000.
are liable to SDLT on their first sale. The relief
will not be available on second and subsequent                    Transactions involving leases for a term of seven
sales or on existing flats even when converted to                 years or more will have to be notified only where
meet the zero-carbon criteria.                                    any chargeable consideration other than rent is
                                                                  more than £40,000 or where the annual rent is
The relief will provide complete removal of SDLT                  more than £1,000.
liabilities for all new zero-carbon flats up to a
purchase price of £500,000. Where the purchase                    Moreover, further changes will mean that it will no
price of the flat is in excess of £500,000, the                   longer be necessary to complete either HMRC
SDLT liability will be reduced by £15,000. The                    form SDLT 1 or the SDLT 60 certificate that no
balance of the SDLT liability will be due in the                  SDLT is due if the transaction is below the
normal way.                                                       notifiable threshold.

The regulations –The Stamp Duty Land tax (Zero-                   The ‘£600 rule’
Carbon Homes Relief) Regulations 2007 – came into                 Provisions in FA 2003 prevent the manipulation of
force on 7 December 2007. Legislation to be                       lease thresholds and apply to leases where payment
introduced in FB 2008 will amend FA 2007 s19 so                   is made by both rent and a premium when the lease
that the power to make regulations extends to                     is signed. The rule states that where the annual rent
include new flats. Further regulations will be laid               on a lease is more than £600, then the normal 0%
after FB 2008 receives Royal Assent to provide for a              thresholds that would have effect (£125,000 for
fee to be charged by a Government department and                  residential property and £150,000 for non-residential
to clarify the position in respect of certificates for any        property) are withdrawn and SDLT is charged at 1%.
qualifying flats brought prior to the amendments to
FA 2003 s58B.                                                     This measure will amend these rules as follows:
                                                                       for non-residential properties where the
(HMRC Budget release BN56 13.3.08)                                       annual rent on a lease is £1,000 or more,
                                                                         then the normal 0% threshold which would
3.3     Budget      2008:     Notification                               have effect at £150,000 is withdrawn and
        Thresholds for Land Transactions                                 SDLT is charged at 1%; and
        and    Rate     Thresholds      for
                                                                           for residential properties the rule will no
        Leasehold Property                                                  longer have effect and, regardless of what
                                                                            rent is paid, the normal thresholds will have
Context                                                                     effect to any premium paid. This amendment
FB 2008 will change the rules for persons notifying                         will also have effect in respect of
HMRC about land transactions. The ‘£600 rule’ will                          disadvantaged areas relief.
also be changed and, from later this year, agents will
be allowed to sign declarations in the certificate that           The certificate that no SDLT is due (SDLT 60)
no SDLT is due.                                                   The HMRC form prescribed by regulations does not
                                                                  permit agents to sign the certificate that no SDLT is
HMRC must be notified about most transactions                     due on behalf of their clients (form SDLT 60). The
involving the acquisition of a major interest in land             form can only be signed by the person making the
for consideration unless specifically exempted. This              transaction. HMRC will amend that form by
measure will raise the threshold for when a person                regulations later in 2008 so that agents will be able
has to notify HMRC of a land transaction.                         to sign the declaration in the certificate on behalf
                                                                  of their clients.
Leases must be notified if the lease is for a period of
seven years or more and the grant is made for a                   (HMRC Budget release BN57 13.3.08)
chargeable consideration. Leases should also be
notified when they are granted for periods of less                3.4       Budget     2008:    Anti-avoidance
than seven years, but tax is chargeable at a rate of
                                                                            Legislation Affecting Partnerships
1% or higher on either or both any premium or rent
paid. This also applies in circumstances where there
                                                                  Context: current law
would have been tax chargeable at a rate of 1% or
                                                                  Legislation in FA 2007 tackled schemes which
higher but for the availability of a relief.
                                                                  allowed payment of SDLT to be avoided by using
                                                                  provisions in the then existing SDLT legislation
Since most transactions currently have to be notified
                                                                  intended to help the transfer of property between
to HMRC, many of the transactions notified are ones
                                                                  different partners within an investment partnership.
where no SDLT is payable.
                                                                  The following parts of SDLT legislation within FA
                                                                  2003 were amended:
                                                             10                                            April 2008
         the charge on transfers into partnerships set        Alternative finance
          out in Sch 15 paras 10-12;                           FA 2003 ss71A, 72, 72A and 73 were introduced in
                                                               2005 to encourage the use of alternative finance
         the charge on transfers out of partnerships          structures which did not use conventional mortgage
          set out in Sch 15 paras 18-20; and                   schemes to buy property. S71A(2) allows an
                                                               exemption from SDLT where there is a purchase by
         the charge on transfers of an interest in a          the lender from the borrower. S72 allows the
          property-investment partnership set out in           equivalent exemption in Scotland. These equate to
          Sch 15 para 14.                                      schemes where someone takes a mortgage out on
                                                               what was a previously mortgage-free property. The
The 2007 legislation                                           legislation also exempts a purchase by the lender
The legislation in FA 2007 affected property-                  from the borrower where there is a re-mortgage.
investment partnerships by ensuring that each time             (Ss72A and 73 allow the Scottish equivalents of
there was a change in the size of share held within            these types of exemptions.)
the property-investment partnership there was an
SDLT charge, regardless of whether there was any               Some financial institutions have misused these two
consideration paid for the change and regardless of            exemptions from SDLT by colluding with vendors so
whether the parties involved in the transaction were           that ownership of a property is placed in a subsidiary
connected to each other in any way. Previously,                company of the financial institution. The subsidiary
provisions in SDLT legislation to help ease the                then claims that the transaction is intended for the
movement of property between partners had been                 purposes of allowing the equivalent of mortgaging on
used to relieve these transactions of the charge to            a mortgage-free property or re-mortgaging.
SDLT that would have been due on transactions
involving transfers between partners.                          Once ownership of the property has passed from the
                                                               vendor to the subsidiary, however, the financial
Proposed revisions                                             institution can then sell the property without incurring
FB 2008 will amend the provisions in FA 2003                   any SDLT by selling shares in the subsidiary
inserted by FA 2007 in order to ensure that                    company.
where there is a transfer of an interest in a
property within an investment partnership, there               New provisions will ensure that relief under
will be no SDLT charge, with effect from 19.7.07.              ss71A or 72 will not be available if there are
                                                               arrangements in place for a person to acquire
(HMRC Budget release BN58 13.3.08)                             control of the financial institution.

                                                               (HMRC Budget release BN60 13.3.08)
3.5       Budget 2008: Anti-avoidance
                                                               Disclosure of use of SDLT avoidance schemes
Group relief                                                   for residential property
FA 2003 Sch 7 para 1 allows companies to claim                 The Government has announced that the Tax
group relief on transfers of assets between group              Avoidance Scheme Disclosure Regime will
members. A restriction is placed on the relief where           extend the SDLT disclosure rules to include
a property is transferred to a group company and the           residential property above £1 million from later
purchaser then ceases to be a member of the same               this year. The draft secondary legislation allowing
group as the vendor. HMRC can then claw back any               this will also be the subject of consultation later in
group relief.                                                  2008.
HMRC have identified a number of avoidance                     From Budget Day, anti-avoidance legislation will be
schemes structured to avoid the clawback provisions            introduced to prevent abuse where financial
in the legislation. The transactions are structured in         institutions assist parties to avoid payment of SDLT.
such a way that it is the vendor who leaves the
group first, thereby allowing the purchasing company           (HMRC What’s New? 14.3.08)
to leave the group subsequently without there being
any clawback of SDLT group relief.
                                                               3.6     SDLT: Policy and Processing
This legislation will have effect where the vendor                     Organisation within HMRC
leaves the group and there is then a subsequent
change in the control of the purchaser within a                HMRC have published a chart to enable taxpayers
period of three years of the asset having been                 and their agents to gain an overview of the teams
transferred. The provision will enable HMRC to                 involved in the SDLT process.
link these two events and treat the purchaser as
having left the group first. Group relief will not             (HMRC What’s New? 4.3.08)
be clawed back where only the vendor leaves the
group.

(HMRC Budget release BN59 13.3.08)
                                                          11                                                April 2008
3.7     Practitioner’s News Issue 20 –                           4.      PERSONAL INCOME TAX
        February 2008
                                                                 4.1     Budget 2008: The New Statutory
The latest issue of the Practitioner’s News covers                       Residence Rule
the following:
      Stamp Taxes Online.                                       Context
      New enhancements.                                         HMRC’s booklet IR 20 states that days of arrival and
      Printing and submitting the SDLT 5                        departure are generally ignored in determining
         certificate                                             whether an individual is UK resident. This of course
         A reminder to send the online certificate -             is qualified in the case where a UK resident is
         not the submission receipt - to the                     seeking to become non-UK resident, in requiring a
         appropriate land registry.                              ‘clean break’. The PBR of 9 October 2007 proposed
      Local         Authorities     and    government           counting days of arrival and departure as days of
         departments          can      now      register.        presence in the UK for residence test purposes, from
         These customers can now get the ‘unique                 2008/09, subject to a limited exception for transit
         identifiers’ they need to register for the              passengers (see MTR 11/07 Item 4.2 and 2/08 Item
         service.                                                4.1)
      Transactions with 100 or more properties:
         the submission process.                                 The statutory rule from 2008/09
      How to set up ‘Users’ and ‘Assistants’                    A day will be counted only where the taxpayer is
         How you can add ‘Users’ and ‘Assistants’                physically present in the UK at midnight.
         once you activated your registration.
      Adding ‘Company Details’ to an HMRC                       The original rule for transit passengers was very
         return.                                                 strict, requiring them not to leave any part of an
      Multiple properties. Confirmation that, in the            airport or port to which members of the general
         ‘Multiple addresses’ article in Practitioners           public did not have access unless arriving in or
         Newsletter Issue 13, HMRC were referring                departing from the UK. Now, transit passengers
         to PDF versions of SDLT 3s and 4s (in                   who change between different terminals of the
         respect of information that land registries             same airport, between different airports or
         would expect to see on an SDLT 5 for                    arriving and departing by different modes of
         multiple properties.)                                   transport will not be regarded as present in the
      What to do if you don’t activate your                     UK even when here at midnight. However, they
         registration within 28 days.         You must           must not engage in activities ‘to a substantial
         access ‘Service Reset’ before you can begin             extent unrelated to their passage through the
         filing online.                                          UK’, for example business meetings.
      Shared          equity     lease    transactions:
         confirmation that these can be filed online             (HMRC Budget release BN102 13.3.08)
      Other issues .
      SDLT6 Guidance Notes: how to use the new                  HMRC plan to update IR 20 to apply the statutory
         HTML version. Help with navigation.                     day count test to the non-statutory 91 day test. So,
      CHAPS payments: If you deal with more                     going forward, we have a mixed statutory and non-
         than 10 transactions per week, you can                  statutory position, which is profoundly unsatisfactory.
         make one CHAPS payment covering
         multiple transactions.                                  4.2     Budget 2008: UK Resident Non-UK
      Interest on late paid SDLT: what happens if                       Domiciliaries - Taxation from
         an SDLT 12 statement includes a large                           2008/09
         amount of late paid tax.
      Priority faxes : the number for the priority fax
                                                                 Context
         service (used when HMRC cannot trace
                                                                 Significant amendments are made to the PBR
         original returns) has changed.
                                                                 regime (see MTR 11/07 Item 4.2 and 2/08 Item 4.1).
      Stamp Taxes helpline: between midday –
         2pm has been identified as the quietest
                                                                 The £30,000 charge
         period for receipt of calls by the Stamp
                                                                 This will apply from 2008/09 where the taxpayer has
         Taxes Helpline.
                                                                 been resident in at least 7 out of the previous 9 tax
      Stamp Taxes reorganisation: as part of their              years if he wishes to claim the remittance basis. The
         drive to improve customer service, HMRC                 charge is in addition to any tax due on foreign
         are continuing to centralise most of their              income and games remitted to the UK. There are
         work in Birmingham Stamp Office.                        three main changes to the draft legislation: the
      Previous issues of the SDLT Practitioners’                de minimis has been raised from £1,000 to
         Newsletter.                                             £2,000; (b) the charge will apply only to adults,
      Quick links: Stamp Taxes ‘Welcome’ page.                  so will become payable in the year a person
                                                                 turns 18; and (c) it will be a tax charge on
(HMRC What’s New? 4.3.08)
                                                            12                                               April 2008
unremitted income and gains rather than a                     it, even if that asset is currently outside the UK
stand-alone charge.                                           and later imported. Any asset in the UK on
                                                              5.4.08 will also be exempt from a charge under
A person paying the charge will choose what foreign           the remittance basis, for so long as the current
income or gains the £30,000 is paid on. If and when           owner owns it, even if that asset is later exported
the unremitted income or gains on which the tax has           and then re-imported. The existing charge which
been paid is remitted to the UK, it will not be taxed         arises if such an asset is sold in the UK will
again. Ordering rules will determine that untaxed             remain.
unremitted foreign income or gains will be treated as
remitted before income or gains upon which the                The current rules which tax employment income and
£30,000 has been charged. Now that the charge is              capital gains on entry into the UK of assets
treated as income tax or CGT it should be treated as          purchased out of that untaxed foreign employment
such for the purposes of double taxation agreements           income or capital gains remain unchanged.
(and will be available to cover Gift Aid donations).
An analysis of how the charge will be treated by the          ‘Claims mechanism’
US under the UK/US double taxation agreement is               Foreign savings and investment income arising in a
the subject of an annex written by US lawyers                 year in which the remittance basis is claimed will be
Skadden, Arps, Slate, Meagher & Flom LLP:                     taxed if it is remitted to the UK, irrespective of the
complex issues are raised.                                    year in which it is remitted and whether or not a
                                                              claim to the remittance basis is made in the year in
If the £30,000 charge is paid from an offshore                which the remittance is made.
source direct to HMRC by cheque or electronic
transfer, it will not itself be taxed as a remittance.        Mixed funds
If the £30,000 is repaid it will be taxed as a                Clear statutory rules will be laid down for determining
remittance at that point.                                     how much of a transfer from a mixed fund is treated
                                                              as the individual’s income or chargeable gains and
(HMRC Budget release BN107 13.3.08)                           the manner in which these amounts are chargeable
                                                              to tax. These rules will be more comprehensive than
Personal allowances and the remittance basis                  those in the draft legislation published on 18.1.08.
As proposed at the PBR, entitlement to personal
allowances and the annual CGT exemption is lost for           Alienation
any year where a taxpayer claims the remittance               New rules will have effect where an individual
basis. The only difference is an increase in the de           arranges for money or property to be brought into
minimis from £1,000 to £2,000.        Full personal           the UK, or services and benefits to be provided in
allowances and the CGT annual exemption will be               the UK, which were funded out of untaxed foreign
given for any year in which an individual does not            income or gains. Where that individual or their
claim the remittance basis.                                   immediate family benefits in any way, that individual
                                                              will be taxed on that money, property, services or
(HMRC Budget release BN103 13.3.08)                           benefits under the remittance basis.

Closing loopholes in the remittance basis                     The definition of ‘immediate family’ will be more
                                                              limited than the ‘relevant person’ definition
‘Ceased source’                                               proposed in the draft legislation of 18.1.08. It will
As from 2008/09 in a year for which the remittance            be limited to spouses, civil partners, individuals
basis has been claimed income will be liable to tax if        living together as spouses or civil partners and
it is remitted to the UK even where the source of the         their children or grandchildren under 18. It will
income has ceased in a previous year.                         also cover close companies, or foreign
                                                              companies which would be close if UK resident,
‘Cash only’                                                   of which any of them are participators and trusts
Money, property and services derived from relevant            of which any of them are settlors or
foreign income brought into the UK in 2008/09 or              beneficiaries. [While a welcome improvement on
thereafter will be treated as a remittance and will be        the original proposals, many traps might arise with
taxed as such. There will be exemptions for                   companies and trusts where remittances could occur
personal effects (that is, clothes, shoes,                    without the knowledge and/or benefit to the
jewellery and watches), assets costing less than              individual taxpayer. In particular, foreign trusts may
£1,000, assets brought into the UK for repair and             have to remit money to the UK to pay for UK
restoration and assets in the UK for less than a              professional fees.]
total 9 month period purchased out of relevant
foreign income.                                               Non-resident trusts
                                                              Non-UK domiciled beneficiaries who claim the
Any asset purchased out of untaxed relevant                   remittance basis will from 2008/09 be taxed on the
foreign income which an individual owned on                   remittance basis on income and gains from all UK
11.3.08 will be exempt from a charge under the                and offshore assets. See Item 1.1 for CGT and, in
remittance basis, so long as that individual owns             particular, the rebasing election.    Settlors and
                                                         13                                               April 2008
beneficiaries of non-UK resident trusts will not be             Art for public display
required to disclose information to HMRC about trust            FB 2008 will allow works of art purchased overseas
assets from which a remittance arose, or details of             from unremitted untaxed employment income,
the trustees, provided they have made a correct                 capital gains or relevant foreign income to be
return of their tax liabilities. Beneficiaries of non-UK        brought into the UK for public display without giving
resident trusts may have to provide additional                  rise to an income tax or CGT charge under the
information to HMRC when the trustees choose to                 remittance basis. This new scheme will be based on
make an election to rebase trust assets or where                the existing HMRC schemes for VAT and import duty
HMRC enquire into a beneficiary’s tax return.                   (temporary imports and items brought into the UK
                                                                permanently by museums and galleries). It will allow
Non-resident companies                                          for works of art to be imported either indefinitely or
The draft legislation amending s13 and introducing              temporarily without giving rise to a charge to tax on
new s14A ensure that UK resident participators of               the remittance basis, so long as that work of art is on
foreign companies will be taxed on the company’s                public display in an approved establishment. Works
chargeable gains irrespective of the domicile of the            of art not on display, but held by approved
participator. Some minor changes will be made as a              establishments for the public to see or for
result of the consultation.                                     educational purposes, will also be covered by the
                                                                scheme.
Transfer of assets abroad
This anti-avoidance legislation is to be amended to             (HMRC Budget release BN105 13.3.08)
ensure that it applies to non-UK domiciled
individuals. The remittance basis will apply to                 Changes for employment-related securities
remittance basis users.                                         This measure will apply to employees who are UK
                                                                resident but not ordinarily resident or not domiciled in
Accrued income scheme                                           the UK. Where taxable gains (eg from unapproved
The draft legislation published on 18.1.08 ensures              options) are partly derived from employment duties
that the income tax charge has effect for non-UK                in the UK and partly from non-UK duties, they will be
domiciled individuals.                                          apportioned appropriately. Gains from employment-
                                                                related securities related to duties outside the UK will
CGT losses                                                      be subject to UK income tax to the extent that they
The legislation will be amended so that non-UK                  are remitted.
domiciled individuals taxed on the arising basis who
have not claimed the remittance basis from 2008/09              (HMRC Budget release BN106 13.3.08)
will get relief for foreign losses. Individuals who
claim the remittance basis from 2008/09 will be able            Foreign dividend income
to elect into a regime which enables them to get                ITTOIA 2005 mistakenly changed the rate at which
relief for their foreign losses in the UK in years in           foreign dividend income is charged to tax on
which they are taxed on the arising basis. That                 remittance basis users from 40% to 32.5%. Tax law
election will be irrevocable: as it will require non-UK         rewrite bills are not intended to amend the substance
domiciliaries to disclose details of unremitted capital         of tax legislation. Remittance basis users liable at
gains, the election will be optional.                           the higher rate will be taxed at 40% on foreign
                                                                dividend income remitted to the UK.
Offshore mortgages
HMRC have said that the draft legislation published             (HMRC Budget release BN101 13.3.08)
on 18.1.08 would treat as a remittance a payment of
interest as well as repayment of the principal where            4.3     Residence and Domicile Reform:
made out of foreign income or gains in cases where                      HMRC’s FAQs
the principal had been brought into the UK. FB 2008
will include grandfathering provisions, so that                 HMRC announced on their website that additional
untaxed relevant foreign income used to fund                    FAQs have been added giving more details of the
interest payments on existing mortgages secured on              new rules on Residence and Domicile [but without
UK residential property will not be treated as a                telling us which ones!].
remittance on or after 6.4.08. This grandfathering
will have effect for repayments for the remaining               There is a fairly extensive set of FAQs now, grouped
period of the loan or until 5.4.28, whichever is                under the following headings:
shorter. In addition, if the terms of the loan are
                                                                    Arising basis
varied or any further advances made after 12.3.08,
                                                                    Day counting
the repayments will be treated as remittances from
that point.                                                         Disclosure
                                                                    Domicile status
(HMRC Budget release BN104 13.3.08)                                 General
                                                                    Non-resident trusts
                                                                    PAYE
                                                                    Personal allowances

                                                           14                                                April 2008
         Remittances                                          shareholding in the distributing non-UK resident
         The remittance basis and the £30,000                 company. The other previously announced condition,
          charge                                               that in total the individual must receive less than
                                                               £5,000 of dividends a year from non-UK resident
(HMRC What’s New? 17.3.08)                                     companies, will not be introduced.

                                                               FB 2009 to give relief for larger shareholdings
4.4       Residence and Domicile Reform:
                                                               FB 2009 will further extend eligibility for the non-
          Non-UK Domiciliaries                                 payable tax credit to individuals in receipt of
                                                               dividends from non-UK resident companies where
Context                                                        the individual owns a 10% or greater shareholding in
Members of the STEP Technical Committee                        the distributing non-UK resident company. The tax
attended a meeting with HMRC on 20.3.08 at which               credit will not be available if the source country does
HMRC responded to some of the questions which                  not levy a tax on corporate profits similar to
had been raised following the Budget in relation to            corporation tax. There will be anti-avoidance
the new rules on trusts and the taxation of non-               measures to ensure that these new rules are not
domiciliaries.                                                 subject to abuse.
STEP’s understanding of several important                      (HMRC Budget release BN29 13.3.08)
points which were made at that meeting
1.      The Finance Bill will be published on 27
                                                               4.6     Budget      2008:    Income     of
March, but it will contain several provisions in
relation to non-resident trusts/non-domiciliaries                      Beneficiaries     Under   Settlor-
which HMRC already know will need to be amended                        Interested Trusts
before the Bill receives Royal Assent.
                                                               Context
2.      It is not intended that adult children or adult        The income of a ‘settlor-interested’ trust is deemed,
grandchildren will be included in the definition of            for the purposes of income tax, to be the settlor’s
‘immediate family’ under the new remittance rules.             income. Tax paid by the trustees of such trusts is
The relevant wording of BN 104 is unclear. There will          treated as paid on behalf of the settlor. This is in
be two sets of rules in relation to alienation and             contrast to other trusts where the tax paid by
remittances.                                                   trustees is available to the beneficiaries. To avoid
                                                               the double taxation which would otherwise result,
3.      All income from ‘source closing’, whenever             ITTOIA 2005 s685A provides that income paid by
generated, which has arisen to a non-domiciliary will          trustees of a settlor-interested trust to (non-settlor)
be taxable if remitted after 5.4.08.                           beneficiaries comes with a non-repayable ‘notional’
                                                               tax credit equal to the higher rate of tax (currently
4.      In relation to the £30,000 levy, this will be          40%) which covers all the tax liability on that income.
available as a credit against UK tax only if all the
individual’s offshore income and gains have been               However, under current statutory ordering rules
remitted to the UK.                                            income from a trust is charged before savings and/or
                                                               dividend income. The result is that a beneficiary of
5.      As    currently    drafted,    back-to-back            such a trust who also has savings and/or dividend
arrangements are not included in the grandfathering            income may find that the non-trust income is pushed
provisions announced on Budget Day.                            into higher rates so that more tax is due overall (see
                                                               MTR 1/08 Item 4.1 and 2/08 Item 4.2).
(Release by STEP’s UK Technical Committee
26.3.08)                                                       Proposed revisions
                                                               The measure amends this ordering rule, such that
4.5       Budget 2008: Foreign Dividends                       income from a settlor-interested trust is treated
                                                               within ITA 2007 s1012 as one of the highest
                                                               slices of income.
Context
The Budget 2007 measure to allow foreign dividends
                                                               (HMRC Budget release BN53 13.3.08)
a tax credit subject to limitation is to be enacted and
extended by FB 2008 – and further extended by FB
2009.                                                          4.7     Budget    2008:     Gift            Aid      –
                                                                       Transitional Relief
No £5,000 limit                                                Context
FB 2008 will extend the non-payable tax credit of              One obvious impact of the reduction of the basic rate
one ninth of the distribution to UK resident                   to 20% from 2008/09 is a reduction from 22% to 20%
individuals and UK and other EEA nationals in                  of the gross payment the amount of which UK
receipt of dividends from non-UK resident                      charities can reclaim from qualifying Gift Aid
companies, if they own less than a 10%
                                                          15                                               April 2008
donations.      The blow is to be softened by a                 small companies’ rate (marginal small companies’
transitional relief for the first three years.                  rate) at 7/400. Profits limits will remain the same.

The new transitional relief                                     The small companies’ rate for ring fence profits will
FB 2008 will supplement current Gift Aid legislation            remain at 19% from 1.4.08 and the marginal small
for charities and CASCs, as a consequence of the                companies’ relief fraction for ring fence profits will
reduction of the basic rate of income tax from 6.4.08.          remain at 11/400.

This legislation will require HMRC to pay a                     (HMRC Budget release BN03 13.3.08)
transitional relief supplement to charities and CASCs
based on qualifying Gift Aid donations shown on                 Simplification of associated companies rules
claim form R68, if the claim is allowed. The relief for         The Small Companies’ Rate (SCR) rules are
claims made before the date of Royal Assent of the              contained in TA 1988 s13. The SCR has effect for
Finance Bill and Appropriation Bill will be paid                companies whose annual rate of profits does not
separately by HMRC without the need for an                      exceed the ‘lower relevant maximum amount’
additional claim by charities or CASCs.                         (s13(1)). If the rate is above this amount but does
                                                                not exceed the ‘upper relevant maximum amount’ a
The rate of the transitional relief supplement will be          marginal relief is due (s13(2)).
2% and will be applied to qualifying donations made
in the years 2008/09, 2009/10 and 2010/11.                      The upper and lower maximum relevant amounts are
                                                                set out in s13(3). S13(3)(b) reduces the amounts if
The relief will be calculated by grossing up the                the company has one or more associated
donation by the sum of the basic rate and the rate of           companies. ‘Associated company’ is defined at
supplement. The amount of relief due will be the                s13(4) as one company controlling another or two
difference between that figure and the amount of the            companies being under common control, with TA
donation grossed up at the basic rate of tax.                   1988 s416 being used to determine control. In
                                                                establishing control of a company, s416(6) requires
Charities and CASCs will be eligible to receive                 the attribution to a person of any rights or powers
payments of the Gift Aid transitional relief in respect         held by his associates.
of Gift Aid repayment claims allowed by HMRC
providing that the claim on form R68 is made:                   S417(3) defines the meaning of associate and
                                                                s417(3)(a) includes business partner within that
       for charitable trusts, up to two years after the        definition.
        end of the tax year to which the claim
        relates; and                                            FB 2008 will revise the definition of ‘control’, solely
     for charitable companies or CASCs, up to                  for the purposes of SCR, by amending the wording
        two years from the end of the accounting                of s13(2) and inserting new ss4A, 4B and 4C into TA
        period to which it relates.                             1988 s13.
The amount of the transitional relief will be limited by        The new wording and subsections will ensure
the amount of qualifying donations, so will increase            that the rights or powers held by business
or decrease as levels of qualifying Gift Aid donations          partners will be attributed only when ‘relevant
received by a charity increase or decrease.                     tax planning arrangements have at any time had
                                                                effect in respect of the taxpayer company’.
(HMRC Budget release BN52 13.3.08)                              ‘Relevant tax planning arrangements’ will be defined
                                                                as arrangements which involve the shareholder or
                                                                director and the partner and secure a tax advantage
5.        BUSINESS TAX                                          by virtue of greater relief under TA 1988 s13.

5.1       Budget     2008:     Corporation         Tax          (HMRC Budget release BN04 13.3.08)
          Rates                                                 See MTR 10/07 Item 5.3.

Main rates
FB 2008 will set the main rate of corporation tax at
                                                                5.2     Budget 2008: Research                     and
28% on and after 1.4.09.         The main rate for                      Development Tax Relief
companies’ ring fence profits (from oil extraction and
oil rights) will also remain at 30% on and after                Context
1.4.09.                                                         Budget 2007 announced increases as follows:
                                                                    The enhanced deduction for small and
Small companies rates                                                  medium-sized enterprises rising from 150%
FB 2008 will set the small companies’ rate for all                     to 175%; and
profits, apart from ring fence profits, at 21% from                 The enhanced deduction available to large
1.4.08 and set the fraction used in smoothing the                      companies to increase from 125% to 130%.
difference between the main rate of CT and the
                                                           16                                               April 2008
Operative date                                                5.4     Budget 2008: 100% First Year
These changes will now not take effect until a date to
be appointed by Treasury Order.
                                                                      Allowances for Expenditure on
                                                                      Cars with Low Carbon Dioxide
(HMRC Budget release BN05 13.3.08)                                    Emissions

5.3     Budget 2008: Capital Allowances                       Context: current law
                                                              Capital allowances allow business to write off the
Context                                                       costs of capital assets, such as plant and machinery,
Various changes announced at Budget 2007 and                  against their taxable income. They take the place of
since are to go ahead, with some other changes.               commercial depreciation, which is not an allowable
                                                              deduction in computing profits for tax purposes. On
The changes in a nutshell                                     and after 1.4.08 the general rate of plant and
    The main rate of writing down allowances for             machinery writing down allowance (WDA) will be
       plant and machinery falls from 25% to 20%.             20% per annum on a reducing balance basis.
       Pools of less than £1,000 will attract 100%
       write off.                                             100% first-year allowances (FYAs) bring forward the
    Long life assets and integral fixtures are put           time tax relief is available by enabling a business to
       into a separate pool attracting writing down           claim relief on the full cost of an asset against its
       allowances of 10% (instead of 6% and 25%               profits for the year in which the investment is made.
       respectively).
    Agricultural business allowances and                     Proposed revisions
       industrial building allowances will be phased          A scheme exists which gives 100% FYAs to all
       out over a four year period, finishing in April        businesses that purchase new cars with CO
                                                                                                                   2
       2011. Enterprise zone allowances (which                emissions not exceeding 120g/km driven. The
       primarily provide a 100% incentive                     scheme is due to end on 31.3.08. This measure will
       allowance) will not be subject to these                extend the scheme for an additional five years to
       phasing out rules, but they also will be               31.3.08.
       withdrawn from April 2011.
    There will be a new 10% writing down                     The definition of a qualifying low CO car will also be
                                                                                                      2
       allowance for any new thermal insulation of
                                                              amended. For expenditure incurred on or after
       a building used for a business purpose
                                                              1.4.08 the applicable CO emissions threshold will
       (other than residential letting).                                                 2
    First year allowances for small and medium-              be reduced from not exceeding 120g/km driven to
       sized businesses will be replaced by an                not exceeding 110g/km driven.
       annual investment allowance of up to
       £50,000 per annum.                                     Low emission cars are not subject to the special
                                                              rules for cars costing over £12,000. So it has been
(HMRC Budget releases BN06, 07, 08 and 15                     necessary to introduce a transitional rule to ensure
13.3.08)                                                      that lessees who have entered into contracts to
                                                              lease cars that currently qualify as low CO emission
                                                                                                          2
Capital allowances buying and acceleration: anti-             cars do not find mid lease, that as a result of the
avoidance                                                     change to the definition of a low CO emissions car,
FB 2008 will prevent avoidance of corporation tax                                                     2

through schemes which use arrangements intended               their cars no longer qualify as such.
to crystallise a balancing allowance on plant or
machinery used for the purposes of the trade to               This rule will ensure that payments on leases in
make it available to a profitable group not intending         existence on 31.3.08 for cars costing over £12,000
to carry on the trade for the long term.                      with CO emissions above the new threshold but
                                                                       2
                                                              below the current threshold (i.e. between 110g/km
The measure will have effect, for example, where a            and 120g/km) are not subject to the LRR for the
loss-making company is sold to an unconnected                 period on and after 1.4.08 until the expiry of the
profitable group prior to the trade (rather than the          lease.
company) being sold to a third party a short time
later. The measure will prevent the sale of the trade         (HMRC Budget release BN11 13.3.08)
leading to a balancing allowance in the hands of the
profitable group.                                             5.5     Budget 2008: Trading Stock
(HMRC Budget release BN24 13.3.08)
                                                              Context
                                                              Business profits for tax purposes are generally
                                                              calculated in line with Generally Accepted
                                                              Accounting Practice (GAAP). This has a statutory
                                                         17                                               April 2008
basis in FA 1998 s42 as amended by FA 2002
s103(5). However, FA 1998 s42(1) makes clear that               5.7     Budget 2008: Financial Products
this basic principle is subject to ‘any adjustment                      Avoidance – Disguised Interest
required or authorised by law in computing profits for
those purposes’. In other words, tax law, either in                     and Transferring Rights to Lease
statute or case law, will take precedence in                            Rentals
situations where it differs from accountancy practice.
                                                                These measures address a number of avoidance
One example in which GAAP differs from tax law in               schemes which have been notified to HMRC under
this way is where business stock is disposed of other           the disclosure rules introduced in FA 2004. Most
than by way of a trading transaction. Under GAAP,               involve arrangements which give rise to amounts
such a transaction should be credited to the                    which in substance are interest but which are
accounts at either the cost price of the stock or at the        designed not to be taxable as interest (‘disguised
price actually paid on the disposal. However, for tax           interest’). One involves an arrangement which aims
purposes, the GAAP treatment is overridden and the              to exploit existing legislation on disguised interest so
tax computation needs to be adjusted to reflect the             as to generate artificial losses.
appropriation from stock at market value (the ‘market
value rule’). This rule has been in place for many              Work will continue to develop a ‘principles-based’, or
years.                                                          generic, approach to ensuring that all such
                                                                arrangements are taxed in the same way as interest
The market value also has effect where goods are                with the intention of legislating in FB 2009 (see MTR
acquired or appropriated into trading stock other               3/08 Item 12.1). However, in order to tackle
than in the course of a trade.                                  immediate avoidance, FB 2008 will block the
                                                                following schemes:
Proposed revisions
FB 2008 will put the market value rule on a                     (a) arrangements to avoid corporation tax by
statutory basis. Its effect will be to preserve the             receiving interest in the form of non-taxable
current tax treatment of non-trade appropriations               distributions;
of goods into and from trading stock.
                                                                (b) arrangements as a result of which the charge to
(HMRC Budget release BN19 13.3.08)                              tax on interest is reduced or eliminated by credits for
                                                                overseas tax in circumstances where no such tax is
5.6     Budget 2008: Leased Plant or                            ever suffered;
        Machinery – Anti-avoidance                              (c) avoidance of corporation tax by the adoption of
                                                                differing accounting treatments within a group for
This measure will counter avoidance by businesses               convertible debt;
which lease in and lease out the same plant or
machinery to exploit differences in the way in which            (d) arrangements where companies acquire
lease rentals paid and received are taxed in order to           partnership rights in advance for an amount equal to
generate a tax loss where there is no commercial                the discounted value of the rights so as to generate
loss.                                                           disguised interest;

The measure will also counter avoidance involving               (e) arrangements (previously dealt with by FA 2004
leases of plant or machinery which are granted in               s131) where companies which are members of
return for a capital payment, often described as a              partnerships obtain disguised interest on partnership
premium,     and      similar  arrangements,     in             contributions by altering profit-sharing ratios; and
circumstances where the capital payment currently
escapes taxation.                                               (f) schemes where attempts are made to exclude
                                                                from the derivative contracts legislation transactions
Minor changes will be made to the leased plant or               which are designed to produce disguised interest.
machinery anti-avoidance measure which was
announced on 9 October 2007. The changes will                   Legislation will also be introduced to stop schemes
clarify the operation of the rules in a sale and finance        that are intended to avoid or exploit the 2005 ‘shares
leaseback and introduce new rules to ensure that                as debt’ rules in FA 1996 ss91A and 91B by means
lease and finance leaseback arrangements are                    of:
treated in a similar way.
                                                                (g) depreciatory transactions intended to create
(HMRC Budget release BN20 13.3.08)                              artificial losses;

                                                                (h) rates of interest said to be ‘uncommercial’;

                                                                (i) spreading disguised interest between two or more
                                                                companies;
                                                           18                                                April 2008
                                                               5.10    Budget 2008: Restrictions on
(j) ‘falsifying transactions’ which, without affecting                 Trade Loss Relief for Individuals
the overall return, are said to prevent the legislation
from applying; and
                                                               Context
(k) use of exit strategies which do not amount to exit         FA 2007 s26 and Sch 4 legislated to counteract the
arrangements for the purpose of the shares as debt             use of partnership arrangements which generate
rules.                                                         trade losses for use as ‘sideways loss relief’ by a
                                                               non-active or limited partner. Since then HMRC
In addition, the measure will counter notified                 have seen, through the tax avoidance disclosure
schemes which are intended to allow lessors of plant           regime and otherwise, evidence of arrangements of
or machinery to dispose of the right to taxable                a similar nature based on individuals acting as
income in exchange for a tax-free sum. The changes             traders on their own account rather than as partners.
will ensure that where the right to receive rentals is         Proposed revisions
transferred the value receivable will be taxed as              FB 2008 will restrict the amount of sideways loss
income.                                                        relief which can be claimed by an individual, other
                                                               than a partner, carrying on a trade in a non-active
(HMRC Budget release BN21 13.3.08)                             capacity. Where a loss arises to an individual
                                                               carrying on a trade in a non-active capacity as a
                                                               result of tax avoidance arrangements made on or
5.8     Budget 2008: Controlled Foreign                        after 12 March 2008, no sideways loss relief will
        Companies    (CFC)    –   Anti-                        be available for that loss. Otherwise there will be
        Avoidance                                              an annual limit of £25,000 on the total amount of
                                                               sideways loss relief which an individual may
Context                                                        claim from trades carried on in a non-active
The purpose of the CFC legislation is to counter the           capacity.
artificial diversion of profits from the UK so as to
avoid UK tax. It taxes those profits which arise to            For these purposes an individual, other than a
low-taxed foreign companies controlled by UK                   partner, carries on a trade in a non-active capacity
persons and which would have been subject to UK                where the individual spends an average of less than
corporation tax as income had they not been                    10 hours a week, in a relevant period, personally
artificially diverted from the UK. It does not have            engaged in activities of the trade carried on
effect if the CFC qualifies for one of five exemptions.        commercially and with a view to the realisation of
                                                               profits from those activities.

General description of the measure                             The restrictions will not apply to losses which derive
FB 2008 will block a number of artificial                      from qualifying film expenditure, broadly losses that
avoidance schemes which rely on the use of a                   derive from film reliefs in ITTOIA 2005 ss137 to 140,
partnership or a trust to escape a CFC charge                  or to losses of a Lloyd’s underwriting business.
either by misusing one of the exemptions from
the CFC rules or by arranging for profits to be                Transitional rules will apply to the computation of
earned in such a way that they purportedly fall                losses subject to the annual limit where these arise
outside the scope of the rules.                                for an individual’s basis period which begins before
                                                               12 March 2008 and ends on or after that date.
HMRC do not believe that these schemes work, but
these measures will put the question beyond doubt              Legislation will also be introduced to align the
and close off opportunities for other similar                  meaning of non-active partner for the purposes of
avoidance schemes.                                             restrictions to sideways loss relief with the meaning
                                                               of non-active capacity.
(HMRC Budget release BN22 13.3.08)
                                                               (HMRC Budget release BN63 13.3.08)
5.9     Budget 2008: Corporate Intangible
        Assets Regime – Anti-Avoidance                         5.11    Budget 2008: Double               Taxation
                                                                       Relief – Income Tax
FB 2008 will clarify that the effect of the ‘related
party’ rules in the corporate intangible assets regime         Context
is unaffected by any administration, liquidation or            FB 200 will ensure that the credit for any foreign tax
other insolvency proceedings or equivalent                     paid on trade or professional earnings is no more
arrangements in which any company or partnership               than the UK income tax due in respect of the same
may be involved.                                               earnings.
(HMRC Budget release BN23 13.3.08)



                                                          19                                              April 2008
Operative date                                                 the money was received after the share register was
The legislation will have effect for income arising on         written up, which was the time of issue of the shares,
or after 6.4.08 and for foreign tax paid on or after           and accordingly the shares were not fully-paid at the
6.4.08.                                                        time of issue. There was no conditional issue of
                                                               shares and no evidence to support a conditional
Current law and proposed revisions                             issue.
The legislation will clarify the way that TA 1988 s796
defines the maximum credit available against UK                The Special Commissioner (Dr John Avery Jones)
income tax in respect of foreign taxes.                        agreed with HMRC.          The taxpayers appealed,
                                                               relying on the decision in Inwards v Williamson
This measure will confirm existing practice and is in          (HMIT) (2003) Sp C 371, and arguing that when the
keeping with the changes made in 2005 to the                   moneys were used to pay for the share subscription,
corporation tax regime. It will remove doubts about            even though the money had been provided earlier to
the basis of foreign tax credit following recent case          the company, that debt was a ‘technical’ debt and Mr
law.                                                           Blackburn received nothing back from the company
                                                               as a matter of fact. Alternatively they submitted that
(HMRC Budget release BN64 13.3.08)                             the Special Commissioner’s finding that there had
                                                               been a general intention to subscribe for shares
5.12    EIS: Disqualifying Payments – Or                       should have led to the conclusion that the moneys
        Not?                                                   received by the company were on account of capital
                                                               and did not give rise to a loan, relying on Kellar v
Context                                                        Williams [2000] 2 BCLC 390.
The issues in this case were: (a) whether the value
received rules in TCGA 1992 Sch 5B para 13(2)(b)               The decision: ChD (Peter Smith J)
applied in relation to the share issues; and (b)               The EIS legislation contained various checks and
whether the Special Commissioner had been right to             balances to protect against abuse including the
treat some of the share issues as comprising a                 value received rules. The purpose of the scheme
single issue of shares.                                        was to encourage investment by attracting fresh
                                                               money and any device or arrangement which did not
Blackburn and another v HMRC: the facts                        attract new money was not allowable, eg a director
A company (the second taxpayer) was incorporated               could not utilise his pre-existing loan account in his
in 1998 to operate a sports club. It made several              favour with a company to discharge a debt that
issues of shares to its controlling director Mr                would fall on him for a subscription for shares.
Blackburn (the first taxpayer). He claimed enterprise          In Kellar v Williams [2000] 2 BCLC 390 there was an
investment relief (‘EIS relief’) in respect of those           agreement to increase the capital of the company
shares pursuant to TCGA 1992 Sch 5B. HMRC                      and the appellant provided funds for that increase.
rejected the claim, and both taxpayers appealed. Mr            There was no clear indication whether he intended
Blackburn had invested money informally with the               that the moneys would be by way of loan or capital
company without a contract of allotment or a share             contribution. The funds were treated in the
application. The circumstances were such that in               company’s records as capital contributions to make
some cases money had been paid to the company                  up the total of the owners’ equity. The question then
before any application was made for the issue of               arose whether or not on a subsequent liquidation of
shares in respect of that money; and in other cases            the company the moneys thereby contributed by the
the issue of shares had been completed before the              appellant were capital contributions or loans. The
money was paid in respect of the issue.                        opinion of the Privy Council was that where
                                                               shareholders of the company agreed to increase
The taxpayers contended that they were eligible for            capital without a formal allocation of shares, that
EIS relief. New money had been put into the                    capital became like share premium and became part
company and shares had been issued. The word                   of the owners’ equity. Accordingly a payment made
‘issue’ in TA 1988 was appropriate to indicate the             to or on behalf of a company other than by way of
whole process whereby unissued shares were                     payment of shares or by way of a gift was not
applied for, allotted and finally registered. In this          repayable to the payer. The funds were not by way
case the issue was not complete until the money                of a loan.
was received and accordingly there was an issue of
                                                               In the present case, the taxpayers submitted that the
fully-paid shares. Alternatively, there was an issue of
                                                               first taxpayer was putting the money into the
shares subject to the condition precedent that the
                                                               company with the intention of sorting out the issue of
money was received. Where money was paid in
                                                               shares which was identical to the position in Kellar.
advance of the issue of shares it was part of the
                                                               In effect, the finding of the Special
subscription for the shares and did not create a debt
                                                               Commissioner that there was a general intention
within the ‘value received’ rules.
                                                               to put money into the company in respect of
                                                               shares, although it could not be treated as an
HMRC contended that either money was paid to the
                                                               application for shares, meant that the moneys
company in advance of any subscription for shares,
                                                               which were received by the company were on
in which case the value received rules applied, or
                                                          20                                              April 2008
account of capital and not a loan. The company                 Regulations will be made to increase the
could never come under an obligation to repay                  individual employee limit on grants of EMI
them; it would become under an obligation to                   qualifying options from £100,000 to £120,000.
issue shares pursuant to the receipt of that                   Operative date
money on capital account. That was the correct                 The EMI option grant limit increase will have effect in
analysis on the facts of the case and the moneys               respect of options granted on or after 6.4.08 and the
paid by the first taxpayer were capital and could              qualifying company changes will have effect in
not be a loan. The Special Commissioner’s                      respect of options granted on or after the date on
conclusion that the moneys were to be treated                  which FB 2008 receives Royal Assent.
as a loan was incorrect and accordingly the
appeal succeeded in its entirety (Kellar v Williams            Current law and proposed revisions
[2000] 2 BCLC 390 applied).                                    EMIs are tax and NICs advantaged share options
                                                               available to small companies with gross assets not
If the loan analysis had been correct, the argument
                                                               exceeding £30 million, to help them recruit and retain
that there was merely a ‘technical’ loan would have
                                                               employees. In addition to the gross assets test, EMI
been rejected. A broad construction of the legislation
                                                               is limited to companies or groups which are
could not overturn the clear wording applying to loan
                                                               independent and are not in one of the excluded
arrangements, Inwards considered.
                                                               trading activities listed in ITEPA 2003 Sch 5 paras
The Special Commissioner had held that a number                16 to 23. Furthermore, employees have to satisfy a
of shares were part of larger issues in relation to            working time requirement to be granted an EMI
which, on his interpretation, the receipt of value             share option. Currently, employees cannot hold
provision applied. To obtain relief the entirety of the        qualifying EMI options, taking into account Company
shares comprising the issue had to be issued in                Share Option Plan options also granted to them, with
order to raise money for the purpose of the                    a total market value of more than £100,000 at date
qualifying business activity. If the Special                   of grant.
Commissioner had decided that part of those shares
were affected by a return of value, then it could not          To ensure EMI continues to meet the EU State Aid
be said that ‘all the shares’ were issued to raise             guidelines, FB 2008 will make two changes to the
money for the purpose of qualifying business                   EMI legislation in ITEPA 2005 Sch 5. First, it will
activity. The appellants could not successfully                insert an additional test to limit EMI to companies
challenge the factual findings of the Special                  with fewer than 250 full-time employees. If a
Commissioner as to whether in fact there were                  company has part-time employees, the full-time
separate issues or whether a set of shares was part            equivalent number of these can be calculated by
of a single issue.                                             adding to the number of full-time employees a just
                                                               and reasonable fraction for each part-time employee.
HMRC could not successfully contend that the
                                                               Second, the legislation will add shipbuilding, coal
moneys provided to the company were impressed
                                                               and steel production to the list of excluded trades.
with a purpose trust, Barclays Bank Ltd v Quistclose
Investments Ltd [1970] AC 567 considered.
                                                               The qualifying company changes will have effect in
                                                               respect of EMI share options to be granted on or
(Blackburn & Anor v R & C Commrs [2008] EWHC
                                                               after the date on which FB 2008 receives Royal
266 (Ch) 19.2.08 reported at CCH Weekly Tax News
                                                               Assent. The changes will not have effect in respect
Issue 489 3.3.08)
                                                               of qualifying EMI share options already granted
                                                               under the existing rules.

6.        EMPLOYMENT                                           The change to the individual EMI option grant limit
                                                               will have effect in respect of options granted on or
6.1       Budget    2008:       Enterprise                     after 6.4.08. This will allow qualifying companies to
          Management Incentives (EMIs)                         grant new or additional qualifying EMI options to
                                                               their employees up to the new limit of £120,000.
Context
To ensure compliance with EU State                 Aid         (HMRC Budget release BN18 13.3.08)
guidelines, FB 2008 will make two changes:
                                                               6.2     Beneficial Loan Arrangements –
         EMIs will be limited to qualifying                           Official Rates
          companies    with fewer than   250
          employees; and                                       HMRC have announced that the official rate for
                                                               2007/08 of 6.25% will be carried forward to
         companies involved in shipbuilding, coal             2008/09, subject to review in the event of significant
          and steel production will no longer                  rate changes.
          qualify for EMI.
                                                               (HMRC What’s New? 3.3.08)


                                                          21                                               April 2008
6.3     Expenses Payments to Employees                         Further guidance can be found as follows:
        Travelling Outside the UK: Scale                       EIM05255        What the tables contain
        Rates                                                  EIM05260        How to use the benchmark rates
                                                               EIM05265        Employee staying as guest of a
Context
                                                                               private individual
HMRC have published new tables for benchmark
scale rates which employers can use to pay                     EIM05270        Employee receiving free meals and
accommodation and subsistence payments to                                      accommodation
employees whose duties require them to travel                  EIM05275        Employee       staying    in      vacant
outside the UK.                                                                residential property
Tables of benchmark rates                                      EIM05277        Airline employees – relationship with
Subsistence expenses are a common example of                                   Flight Duty Allowances
expenses which employers choose to reimburse by                EIM05280        Examples
means of a scale rate payment (see EIM05200).
EIM05210 contains guidance about the evidence                  (HMRC What’s New? 7.3.08 referring to EIM 05250)
HMRC may require in support of a dispensation
request for scale rate subsistence payments to
employees travelling within the UK. The sampling
                                                               6.4       Salary Sacrifice
technique described in that guidance is not usually
appropriate for employees who travel outside the               Context
UK, because most employers will not have enough                HMRC have published a document describing how
internationally mobile employees to enable them to             salary sacrifice works and its impact on Income Tax,
undertake a meaningful sampling exercise.                      NICs and National Minimum Wage and on
                                                               Contributions- and Earnings-Related Benefits.
HMRC have therefore published tables of
benchmark scale rates which employers can use to               What is a salary sacrifice?
pay accommodation and subsistence expenses to                  A salary sacrifice happens when an employee gives
employees whose duties require them to travel                  up the right to receive part of the cash pay due under
abroad, without the need for the employees to                  his or her contract of employment. Usually the
produce expenses receipts. The tables can be found             sacrifice is made in return for the employer’s
at EIM05290, and are based on information provided             agreement to provide the employee with some form
by the Foreign and Commonwealth Office.                        of non-cash benefit. The 'sacrifice' is achieved by
                                                               varying the employee’s terms and conditions of
Accommodation and subsistence payments at or                   employment relating to pay.
below the published rates will not be liable for
income tax or NICs for employees who travel                    Salary sacrifice is a matter of employment law, not
abroad, and employers need not include them on                 tax law. Where an employee agrees to a salary
forms P11D. However, if an employer decides to pay             sacrifice in return for a non-cash benefit, they give
less than the published rates, its employees are not           up their contractual right to future cash
automatically entitled to tax relief for the shortfall.        remuneration. Employers and employees who are
They can only obtain relief under the employee                 thinking of entering into such arrangements would be
travel rules (see EIM31800 onwards) for their actual,          well advised to obtain legal advice on whether their
vouched expenses, less any amounts paid by their               proposed arrangements achieve their desired result.
employer. By ‘vouched expenses’ HMRC mean
expenses which are supported by receipts, or some              When is salary sacrifice effective?
other contemporaneous record of the amounts                    Salary sacrifice arrangements are effective when
spent.                                                         the contractual right to cash pay has been
                                                               reduced.
These tax/NIC free amounts are in addition to the
incidental overnight expenses that employers may               For that to happen two conditions have to be met:
reimburse tax/NIC free under ITEPA 2003 s240 and
the corresponding NICs disregard (see EIM02710                          the potential future remuneration must be
and NIM06015).                                                           given up before it is treated as received for
                                                                         tax or NICs purposes; and
Employers are not obliged to use the published                          the true construction of the revised
rates. It is always open to an employer to                               contractual arrangement between employer
reimburse their employees’ actual, vouched                               and employee must be that the employee is
expenses, or to negotiate a scale rate amount                            entitled to lower cash remuneration and a
which they believe more accurately reflects their                        benefit.
employees’ spending patterns. Employers
wishing to negotiate such an amount must of                    When is salary sacrifice not effective?
course be able provide HMRC with evidence in                   A salary sacrifice is not effective if, in practice,
support of their figures.                                      the arrangement enables the employee to
                                                          22                                                  April 2008
continue to be entitled to the higher level of cash
remuneration. In other words he has merely                   P46 and the Lower Earnings Limit
asked the employer to apply part of that cash                The employer will have to send HMRC a P46
remuneration on his behalf.                                  (Statement A and B cases) when the employee’s
                                                             earnings reach the Lower Earnings Limit, now £87 a
What information does an employer need to                    week, £377 a month or £4,524 a year.
provide to HMRC?
In order to decide whether a salary sacrifice is             No P45(Part 3) or P46
effective or not HMRC have to consider what the              If the employer does not get a P45 (Part 3) or a
true construction of the revised contractual                 completed P46 from the new employee, the
arrangements is. The employer should provide full            employer will have to fill in section 1 of a P46 and
details of the scheme and of the new contractual             send it to HMRC. The default code BR is used.
arrangements. The employer will need to satisfy
HMRC that the employee’s entitlement to cash pay             Penalties
has been reduced, that a non-cash benefit has been           From April 2009, there will be penalties for sending
provided by the employer, and that the employer is           in-year forms on paper when they should be sent
not simply meeting the employee’s own financial              online. But HMRC will not be charging these straight
commitments.                                                 away.

Salary sacrifice and the National Minimum Wage               At the end of the first, second and third quarters of
A salary sacrifice cannot reduce the employee’s              the 2009/10 tax year, HMRC will write to the
cash pay below the National Minimum Wage.                    employer if paper forms have been sent when online
                                                             filing should have been made, reminding the
How could a salary sacrifice affect future                   employer of the new requirements and offering
entitlement to the State Pension, benefits and               guidance and support. If the employer then sends
Tax Credits?                                                 any paper forms during the fourth quarter (or later),
A salary sacrifice may affect the employee’s                 HMRC will charge a penalty.
entitlement to state benefits and tax credits and the
employee should carefully consider the possible              (HMRC news release 19.3.08)
effects before deciding to go ahead with a change in
the employment contract. The information in the
document is based on the rules that apply at the time
                                                             6.6     PAYE     Regulations:            Changes
of writing.                                                          Following Demibourne

(HMRC What’s New? 17.3.08)                                   Context
                                                             The Special Commissioner’s decision in the case of
                                                             Demibourne Ltd v HMRC highlighted a number of
6.5     PAYE: Changes From April 2008                        tax issues for employers and their employees which
                                                             can arise as a consequence of an employer’s failure
Context                                                      to operate PAYE (Pay As You Earn). These issues
Within the scope of an HMRC news release entitled            relate to a situation where Income Tax has been
‘Doing PAYE online all year round’ is the following          paid in relation to what is PAYE income, but by the
guidance about changes to the P46 reporting                  wrong legal person (ie the employee rather than the
requirements from April 2008.                                employer). See MTR 10/06 Item 6.3.

Changes from April 2008                                      The Demibourne case confirmed that where an
                                                             employment relationship exists, the employer is
Changes to P46 processes                                     responsible for deducting tax from payments
From April 2008, HMRC have agreed a relaxation in            made to the employee in accordance with the
the P46 process.                                             PAYE Regulations. Under the law as it stands,
                                                             HMRC do not have the discretion to choose
When a completed P45 (Part 3) is not provided, the           whether to collect tax from the employer or the
employee will not necessarily have to complete form          employee. This can lead to a situation where
P46. The employer may ask the employee to provide            HMRC are obliged to seek recovery of tax from
this information on the employer’s own stationery or         the employer in relation to income on which tax
in an e-mail, for example. It will be up to the              has previously been paid by (or on behalf of) the
employer to decide how the P46 information is                employee under SA.
obtained and whether a signature from the employee
is needed for the employer’s own purposes. The               HMRC have engaged with the main bodies of the tax
necessary information can be obtained in a way               and accountancy professions and business to
which best suits the employer’s business needs as            identify a solution to the issues highlighted in the
long as a record is kept of where it came from.              Demibourne case. As a consequence of this
                                                             dialogue a legislative solution is being introduced
                                                             from 6 April 2008.
                                                        23                                             April 2008
                                                                 (including investment trust companies and venture
New regulations                                                  capital trusts) and certain overseas funds, with effect
Regulations have been made on 20.3.08 which                      to supplies of services on or after 1.10.08.
amend The Income Tax (Pay As You Earn)
Regulations 2003 (The PAYE Regulations) to                       (HMRC Budget release BN74 13.3.08)
extend the limited circumstances where HMRC
may make a direction to transfer an employer’s                   Indirect tax returns: correction of errors
PAYE liability to the employee who received the                  There is a threshold below which previous errors can
relevant payments from which tax has been                        be corrected on the VAT return for the period in
under deducted. Broadly, the new power to make a                 which the errors are discovered. For accounting
direction will apply where an employer has failed to             periods commencing on or after 1.7.08, the limit is
deduct or account for tax in relation to a relevant              increased from £2,000 to the greater of £10,000 and
payment (payments subject to PAYE as defined in                  1% of turnover, subject to an upper limit of £50,000.
Regulation 4 of the PAYE Regulations), while tax on
that payment has been included in the employee’s                 (HMRC Budget release BN75 13.3.08)
SA, or where no SA has been made but tax has
been paid as a SA payment on account, or has been                Transitional period for claims
deducted as a sub-contractor deduction.                          FB 2008 will provide a transitional period to 31.3.09,
                                                                 during which eligible businesses can make VAT
HMRC will be publishing draft guidance on the                    claims for rights which accrued before the
practical effect of this new legislation in April, but in        introduction in 1996 and 1997 of the three-year time
the meantime reference should be made to further                 limit for claims (see MTR 2/08 Item 8.3 and 3/08
details on new legislation to transfer a PAYE liability          Item 8.1).
from an employer to an employee.
                                                                 The legislation will also correspondingly amend the
(HMRC news release 20.3.08)                                      powers of assessment of HMRC to ensure that
                                                                 assessments may be made to recover any amounts
                                                                 paid, which are subsequently found to have been
7.      NATIONAL INSURANCE                                       incorrectly claimed by business.

No Items to report.                                              (HMRC Budget release BN73 13.3.08)

                                                                 Option to tax land and buildings

8.      VAT & CUSTOMS DUTIES                                     Context: general description
                                                                 This measure will simplify the legislation relating to
8.1     Budget 2008: Various Changes                             the option to tax land and/or buildings. It will also
                                                                 introduce minor changes to enable taxpayers to
Increased turnover threshold for registration and                revoke an option to tax after 20 years and make a
deregistration                                                   number of associated changes to improve practical
The taxable turnover threshold which determines                  administration of the option to tax.
whether a person must be registered for VAT will be
increased from £64,000 to £67,000.                               Operative date
                                                                 The rewritten legislation will have effect on and after
The taxable turnover threshold which determines                  1.6.08. The earliest date an option to tax will be
whether a person may apply for deregistration will be            revocable will be 1.8.09.
increased from £62,000 to £65,000. The existing
conditions for determining entitlement or liability to           Current law and proposed revisions
deregistration remain unchanged.                                 The law relating to the option to tax land and
                                                                 buildings for VAT is contained in VATA 1994 Sch 10.
The registration and deregistration threshold for
relevant acquisitions from other European Union                  A Treasury Order will be laid after Budget 2008 to
Member States will also be increased from £64,000                insert a revised Sch 10 into VATA 1994 and make
to £67,000.                                                      certain consequential changes to other VAT
                                                                 legislation, including new appeal rights. This will be
The new registration and deregistration thresholds               accompanied by a public notice having the force of
will have effect on and after 1 April 2008.                      law.

(HMRC Budget release BN73 13.3.08)                               A number of associated changes to improve
                                                                 practical administration of the option to tax and its
                                                                 revocation will be included in the legislation. These
Amendment to the exemption for fund
                                                                 deal with:
management
The VAT exemption for fund management will be
                                                                        opted properties held in a VAT group;
extended to cover UK-listed investment entities
                                                            24                                               April 2008
                                                                 due from such others to the Commissioners.’ There
         opted buildings acquired for use as                    was ‘no incongruity in their and the public’s interests
          dwellings or for a relevant residential                being in this respect protected by a common law
          purpose and bare land acquired for                     action for conspiracy. ... the claim is not for the VAT
          construction of building for such purposes;            due or for repayment of the VAT credit, it is for
                                                                 damages in respect of loss suffered by the
         the introduction of a new option to simplify           Commissioners due to a successful conspiracy to
          the option to tax process for taxpayers with a         manipulate the VAT system.’ Accordingly there was
          number of properties;                                  ‘nothing in the statutory scheme to preclude the
                                                                 Commissioners’ pursuit of a common law claim for
         early revocation of an option to tax within a          conspiracy against [Total Network]’.
          ‘cooling-off’ period;
                                                                 (HMRC v Total Network SL reported at the Tax
         the automatic lapse of an option to tax six            Journal 24.3.08 p3)
          years after the taxpayer ceased to have any
          interest in a property which they had                  8.3       Transfer   of        Going       Concern
          previously opted to tax;                                         Consultation
         the ability, in certain circumstances, to              On 29 February HMRC issued a summary of final
          exclude a new building from a previous                 responses to its consultation on TOGCs. This can
          option to tax; and                                     be found at:
                                                                 http://customs.hmrc.gov.uk/channelsPortalWebApp/
         late applications for permission to opt to tax.        downloadFile?contentID=HMCE_PROD1_028404.

(HMRC Budget release BN79 13.3.08)                               (HMRC What’s New? 29.2.08)

8.2       Carousel  Fraud:              HL      Allows
          HMRC’s Appeal                                          9.        COMPLIANCE
The HL has allowed HMRC’s appeal against the CA                  9.1       Filing Returns and Paying Tax
decision reported at [2007] STC 1005 (see MTR
3/07 Item 8.1). HMRC had formed the opinion that a                         Online: New Deadlines
Spanish company (Total Network) had been involved
in a series of carousel frauds in relation to the sale of        HMRC have published a series of FAQs, dealing
mobile telephones from Spain to the UK. They took                with the following:
proceedings against Total Network, claiming
damages for conspiracy to cheat the public revenue.                       I’m interested in changes to SA for my
                                                                           personal tax affairs.
The High Court gave judgment for HMRC, and the                            I’m an employer and want to know about the
HL upheld this decision (by a 3-2 majority, Lord                           PAYE changes.
Hope and Lord Neuberger dissenting). Lord Scott of                        I’m VAT registered and want to know what
Foscote described the transactions as a ‘charade’                          changes are coming.
and ‘a fraudulent scheme designed to extract by                           I’m responsible for a CT return – what do I
deception money from the Revenue’. The statutory                           need to do?
provisions relating to VAT did not ‘provide protection                    I’m an agent – what does this mean for me?
against tort claims for those who by fraudulent                           I’m a software developer – how can I get
schemes succeed in extracting money from the                               involved?
Commissioners’. Lord Walker of Gestingthorpe                              Why are these changes happening?
observed that the case concerned ‘illegal, fraudulent
tax evasion which is costing the Exchequer more                  (HMRC What’s New? 14.3.08)
than a billion pounds a year. Indeed it is worse than
evasion: it is the fraudulent extraction of money from
the Exchequer.’ Lord Mance held that ‘there would
be an evident lacuna if the law did not respond to               10.       ADMINISTRATION
this situation by recognising a civil liability ... The
wrongful extraction of the money from the                        10.1      Budget     2008:   Penalties for
Commissioners by deceit involved unlawful means                            Incorrect Returns and Failure to
and a sufficiently actionable wrong to justify a civil                     Notify a Taxable Activity
claim in conspiracy.’ HMRC were entitled ‘to take
common law action in respect of a successful
                                                                 General description of the measure
conspiracy which abstracts monies en route to the
                                                                 FB 2008 will extend the provisions enacted in FA
Commissioners         or    which      prevents      the
                                                                 2007 Sch 24, to create a single penalty regime for
Commissioners from recovering from others what is
                                                                 incorrect returns across all the taxes, levies and
                                                            25                                               April 2008
duties administered by HMRC. The penalty will be
determined by the amount of tax understated, the                For failure to notify a taxable activity there will be no
nature of the behaviour giving rise to the                      penalty unless there is tax and/or NICs due but
understatement and the extent of disclosure by the              unpaid as a result, nor where the taxpayer has a
taxpayer. The use of suspended penalties will be                reasonable excuse for the failure. Otherwise there
extended.                                                       will be a penalty of:

Provision will also be made to extend and adapt FA                     30% of tax unpaid for non-deliberate failure
2007 Sch 24 to cover penalties for failing to register                  to notify;
or notify HMRC of a new taxable activity across all                    70% of tax unpaid for a deliberate failure to
the taxes, levies and duties administered by HMRC,                      notify; and
including late VAT registration.                                       100% of tax unpaid for a deliberate failure
                                                                        with concealment.
Operative date
The new provisions will have effect from a date to be           Each penalty will be substantially reduced where the
appointed by Treasury Order. For incorrect returns,             taxpayer makes a disclosure (takes active steps to
this is expected to be for return periods commencing            put right the problem), more so if this is unprompted.
on or after 1.4.09 where the return is due to be filed
on or after 1.4.10. New penalties for failure to notify         For Class 2 NICs, the provisions will replace the
are expected to have effect for failure to meet                 fixed penalty of £100 for notification more than
notification obligations which arise on or after 1.4.09.        three months after starting self-employment with
                                                                a behaviour based penalty. The obligation to
Current law and proposed revisions                              notify remains unchanged.
The measure will repeal a large number of different
penalty provisions which are specific to each of the            The measure will include full and explicit provisions
taxes, levies or duties covered and replace these               for the right of appeal against all penalty decisions.
with a single legislative framework for penalties for
incorrect returns and another similar one for failing to        HMRC will continue to consult on guidance on the
notify a taxable activity by the required date.                 operation of these penalty provisions between the
                                                                date on which the FB 2008 receives Royal Assent
The new provisions for incorrect returns will provide           and the implementation of the changes. It is intended
for penalties in line with FA 2004 Sch 24, which are            that guidance will be published well ahead of
based on the amount of tax understated, the nature              implementation.
of the behaviour and the extent of disclosure by the
taxpayer. There will be no penalty where a taxpayer             This measure was the subject of a consultation
makes a mistake, but there will be a penalty of up to:          document published on 10.1.08 – Penalties Reform:
                                                                The Next Stage with draft clauses and explanatory
       30% for failure to take reasonable care;                notes. A summary of responses to that consultation
       70% for a deliberate understatement; and                and a Final Impact Assessment, including an
       100% for a deliberate understatement with               explanation of any resulting changes, will be
        concealment.                                            published shortly.

The measure will provide for each penalty to be                 (HMRC Budget release BN96 13.3.08)
substantially reduced where the taxpayer makes a
disclosure (takes active steps to put right the                 10.2    Budget 2008: Compliance Checks
problem), more so if this is unprompted. For an
unprompted disclosure of a failure to take                      Context: General description of the measure
reasonable care the penalty could be reduced to nil.            FB 2008 will reform the rules for checking that
Where a taxpayer discloses fully when prompted by               businesses and individuals have paid the correct
a challenge from HMRC, each penalty could be                    amount of IT, CGT, CT, VAT and PAYE or claimed
reduced by up to 50%.                                           the correct reliefs and allowances.

Where a return is incorrect because a third party has           There will be three elements:
deliberately provided false information or deliberately             aligned and modernised record keeping
withheld information from the taxpayer, with the                       requirements;
intention of causing an understatement of tax due,                  new inspection and information powers;
there will be a new provision allowing a penalty to be                 and
charged on the third party.                                         aligned and modernised time limits for
                                                                       making tax assessments and claims.
The measure will also provide for reformed penalties
for some specific excise duty wrongdoings: misusing             Operative date
goods subject to reduced excise duty rates, eg red              Information powers and penalties for failure to
diesel; and, handling goods on which excise duty                comply with these obligations will have effect on and
should have been paid but has not.                              after 1.4.09. Time limits for making assessments and
                                                           26                                              April 2008
claims will need a transitional period and so will                      an updated criminal offence of destroying or
become fully operative on and after 1.4.10.                              concealing records requested under a notice
                                                                         authorised by a tribunal.
Record Keeping Requirement
Primary legislation requires records to be kept which          Assessment Time Limits
enable a taxpayer to make an accurate return.                  Time limits for changing the amount of tax due by
Further detail of the required records is then set out         assessment vary across the taxes. Current time
in secondary and tertiary legislation. The current             limits are set out below:
rules differ from tax to tax and this measure will pave
the way for an aligned approach.                               Tax            Mistake    Failure to      Deliberate
                                                                                         take            understatement
Information powers                                                                       reasonable
For VAT and PAYE, HMRC have inspection powers                                            care
with no rights of appeal. For IT, CGT and CT, HMRC             VAT            3 years    3 years         20 years
have a combination of information powers, which                (VATA
need pre-authorisation by the appeal commissioners             1994
and can be challenged only by judicial review, and             s77)
enquiry powers which can only be used once an SA               (TMA           5 years    20 years 10     20 years 10
enquiry notice into a particular return has been               1970 ss        10         months          months
issued. Authorisation levels, penalties and appeal             34 & 36)       months
rights differ across the different regimes. The                (FA 1998       6 years    21 years        21 years
relevant legislation is at TMA 1970 ss19A and 20,              Sch 1
VATA 1994 Sch 11 para 7, FA 1998 Sch 18 para 27                para 46)
and the Income Tax (PAYE) Regulations 2003 reg                 PAYE           5 years    20 years 10     20 years 10
97.                                                            (TMA           10         months          months
                                                               1970           months
The new powers will align and modernise HMRC’s                 ss34 &
access to records and information.                             36)
The new package will align existing powers and                 The new legislation will align the time limits for
safeguards and introduce:                                      assessments to the following model:
     a power to inspect records required under
       the record-keeping legislation – this restricts         Tax       Mistake   Discovery   Failure to   Deliberate
       the existing VAT and PAYE inspections to                                                take         understatement
       statutory records and introduces a new                                                  reasonable   or Failure to
                                                                                               care         notify liability
       power of inspection for direct tax;                     VAT       4 years   N/A         4 years      20 years
                                                               IT &      N/A       4 years     6 years      20 years
       a    power     to    require  supplementary            CGT
        information which is relevant to establishing          CT        N/A       4 years     6 years      20 years
        the correct tax position;                              PAYE      4 years   N/A         6 years      20 years


       a power to require third parties to provide            Time limits for taxpayers’ claims will also be aligned,
        information which is relevant to establishing          at 4 years.
        a taxpayer’s correct tax position;
                                                               This measure was the subject of initial consultation
                                                               in May 2007. Responses to that consultation
       a power to visit business premises and to
                                                               together with draft legislation for further consultation
        inspect records, assets and premises;
                                                               were published on 10.1.08 – A New Approach to
                                                               Compliance Checks: Responses to Consultation and
       removal of VAT and PAYE powers to
                                                               Proposals. A summary of responses to that
        undertake inspections at private homes
                                                               consultation and a Final Impact Assessment,
        without taxpayer consent;
                                                               including an explanation of any resulting changes,
                                                               will be published shortly.
       appeal rights against any penalty, and
        against information notices which have not             (HMRC Budget release BN97 13.3.08)
        been pre-authorised by an appeal tribunal;

       penalties for failure to allow an inspection
                                                               10.3      Budget 2008: Payment of Tax
        and failing to comply with an information
        notice, including a tax-geared penalty which           Context: general description of the measure
        can be imposed by the new upper tier                   The measure will make it easier for taxpayers to pay
        tribunals; and                                         what they owe on time, and for HMRC to tackle
                                                               those who seek to avoid their obligations by paying
                                                               late or not at all. There are three separate changes
                                                               to the current law:
                                                          27                                                 April 2008
                                                                were published on 10.1.08 – Payments, Repayments
       new legislation to enable HMRC to                       and Debt: Responses to Consultation and
        introduce a credit card payment service;                Proposals. A summary of responses to that
                                                                consultation and a Final Impact Assessment,
       HMRC will be able to set the repayments                 including an explanation of any resulting changes,
        they must make to individuals and                       will be published shortly.
        businesses against the payments HMRC
        are owed by them; and                                   (HMRC Budget release BN98 13.3.08)

       HMRC’s debt enforcement powers to                       10.4    Offshore Disclosure Facility
        collect unpaid sums by taking control of
        goods in England and Wales, or by taking                Context
        action through the civil courts will be                 From 17.3.08 HMRC have begun to begin to issue
        modernised and aligned.                                 forms and help sheets to around 5,000 individuals
                                                                for whom information is held which indicates that
Operative dates                                                 they currently hold or have held an offshore bank
It is intended that HMRC will be in a position to               account or accounts but who did not disclose under
accept payments by credit card from Autumn 2008.                the Offshore Disclosure Facility (see MTR 3/08 Item
The ability to set repayments against debt will have            12.4).
effect on and after Royal Assent to FB 2008.
                                                                The forms ask for more information about their
The changes to HMRC’s powers to enforce payment                 circumstances and this information will be used to
through the courts will have effect on and after the            verify replies against the bank information held or
date on which FB 2008 receives Royal Assent. In                 consider what further action is necessary.
England & Wales the power to take control of goods
will come into effect in line with the appointed day for        The initial forms will be accompanied by Help sheets
the Tribunals, Courts and Enforcement Act 2007 Sch              designed to guide the individual through completion
12.                                                             of the form. Help and support will also be available
                                                                through HMRC Contact Centres by calling a
Current law and proposed revisions                              designated 0845 number.
Legislation supports a range of payment methods,
but HMRC cannot accept payment by credit cards                  Where the individual has authorised an agent to act
except in certain limited circumstances such as at              for him/her, HMRC will send the questionnaire to the
ports and airports. FB 2008 will allow individuals and          agent, with a copy going to the individual.
businesses to pay tax, duties etc by credit card.
Taxpayers who choose to pay in this way will be                 (AccountingWeb 17.3.08)
charged the transaction fee which HMRC will
themselves be charged. Legislation will be needed               HMRC’s news release
because passing on this fee would otherwise be                  HMRC confirm that they are pursuing those with
outside the functions of HMRC.                                  offshore accounts and tax liabilities who did not
                                                                notify their intention to disclose under the scheme by
Under common law, or by request, HMRC may                       22 June 2007, as well as those who notified but
already set off repayments payable to taxpayers                 decided not to disclose.
against debts they owe to HMRC. This measure will
give a specific power to HMRC to make set-off                   How will HMRC contact me?
across the different taxes, duties etc it administers,          HMRC are now contacting holders of offshore bank
at their discretion.                                            accounts who chose not to disclose under the
                                                                Offshore Disclosure Facility.
HMRC’s powers to enforce the payment of civil debt,
where reminders and other actions have not been                 Depending on the circumstances this contact may
successful, were inherited from the former Inland               take the form of:
Revenue and HM Customs & Excise. These powers                        a letter and an initial form, followed, where
differ across regimes, which can be confusing for                       appropriate, by the issue of a disclosure
taxpayers and lead to unnecessary costs to the                          form to enable account holders with unpaid
Exchequer. This package of changes will modernise                       tax to bring their tax affairs up to date;
and align the enforcement powers in England &                        a formal notice of enquiry;
Wales and Scotland, so that HMRC may recover                         the issue of an SA return for the years where
debts in a single action. It will also mean an end to                   none has been submitted;
the current practice where taxpayers may face two
                                                                     in exceptional circumstances that meet the
sets of costs and fees.
                                                                        criteria within our published Criminal
                                                                        Investigation Policy, the undertaking of a
This measure was the subject of initial consultation
                                                                        criminal investigation;
in June 2007. Responses to that consultation
together with draft legislation for further consultation
                                                           28                                              April 2008
                                                              If we cannot accept your disclosure, it is likely that
1. Tell me more about the initial form (OCG1)?                we will make enquiries in the normal way.
In some circumstances HMRC may choose to issue
a form to ask you for more information before we              For further information on the initial form call our
consider what further action is appropriate.                  dedicated telephone helpline 0845 366 7801
                                                              (international +44 125 384 6155).
If you receive a form this will be because HMRC
holds information from one or more banks that                 2. What if I receive a formal notice of enquiry into
indicates that you hold or have held an offshore              a return?
bank account or accounts. We will use this                    You may receive a formal notice of enquiry. You can
information to verify your replies to the form. If you        find more details about HMRC enquiries on the
receive a form, even if you don’t feel that any tax is        internet under Self Assessment, the legal framework
due, please complete and return it.                           and then enquiries into tax returns.

A Helpsheet will be included to guide you through             HMRC will open an SA enquiry because we hold
completion of the initial form, OCG1(HS) Offshore             information from one or more banks that indicates
Compliance Group - helpsheet for initial form.                that you hold or have held an offshore bank account
                                                              or accounts and we wish to enquire into the
What action will HMRC take on receipt of the                  completeness and accuracy of the information
initial form?                                                 provided in tax returns you have made.
What further action is taken will depend on the
information you provide.                                      If we find that your returns are incomplete and
                                                              you chose not to participate in the Offshore
If you have a reason for not disclosing your                  Disclosure Facility we will take this into account
account(s) we will consider the explanation you give.         in determining the level of penalty to be applied
We will either accept your explanation, or, in certain        which is unlikely to be less than 30% of the tax
circumstances we may challenge the explanation.               and duties due.

What happens if I consider I have unpaid taxes to             3. What if I receive an SA return(s)?
disclose?                                                     If you have a net tax liability you will usually need to
We want to encourage those with unpaid tax and                declare this on a SA tax return.
duties to pay what they owe. If you consider you
have any unpaid taxes we will send you the                    It may be that you have never been in receipt of an
necessary forms for you to calculate the tax you              SA return or have not received one for some time. If
owe.                                                          you have not been issued with a notice requiring you
                                                              to complete a return you still have a statutory
This will include a disclosure form (OCG2)                    responsibility to notify HMRC that you are
accompanied by a OCG2(HS) Offshore Compliance                 chargeable to income tax. You can find out more
Group - disclosure helpsheet and OCG2(WS)                     about your obligation to notify chargeability on the
Offshore Compliance Group - disclosure worksheet              internet under SA Requirement to notify
designed to guide you through completion of the               chargeability.
form.
                                                              The information HMRC has received from the banks
When you return this to us we will then calculate the         may indicate that your circumstances require a
interest and invite you to make an offer to include an        return(s) to be issued.
amount for penalties.
                                                              The issue of the return(s) will allow you to declare
Although you did not participate in the Offshore              your income and for HMRC to take appropriate steps
Disclosure Facility you will now have this further            to regularise your tax position, including charging
opportunity to put things right. Co-operation at this         any interest and penalties due. In certain
stage will be taken into account in determining the           circumstances we will make enquiries into your
level of penalty to be applied. However, this is              returns in the normal way.
unlikely to be less than 30% of the tax and duties
due.                                                          What if I receive no contact and wish to make a
                                                              full disclosure?
We expect the vast majority of disclosures to be              HMRC encourage customers to make voluntary,
accepted.                                                     unprompted disclosures. If you wish to do this, you
                                                              should contact your own tax office.
However, we may need to contact you or your tax
adviser, if you have one, to clarify any points. You          (HMRC news release 17.3.08)
may have to provide appropriate evidence of your
circumstances to satisfy us that your disclosure is
complete.


                                                         29                                                April 2008
11.     EUROPEAN AND                                            partnership or controlled company, where BPR is
                                                                available at the rate of only 50% (IHTA 1984
        INTERNATIONAL                                           s104(1)(b)) but APR may be available at 100%.
                                                                Should such an issue come before the ECJ, some
11.1    Agricultural Property Relief: The                       difficult legal issues would arise.
        Impact of the ECJ Decision in
        Jager                                                   The basis of the decision in Jager was that the tax
                                                                system in one member state must not discriminate
                                                                against ‘identical assets’. The provisions of IHTA
Context                                                         1984 are of course drafted to take account of UK
In general terms, EU legislation requires its Member            property law, and UK tenancy legislation. In
States to permit free movement of capital within the            particular, the proposition that APR will be available
EU Member States may not enact legislation which                at 100% for land farmed by a controlled company or
has the effect of discouraging residents or nationals           farmed partnership, where BPR would be limited to
from investing capital in other Member States.                  50% assumes that the owner is entitled to vacant
Clearly, a national government may enact tax                    possession, or at least that the land is valued on a
legislation which could have the effect of                      vacant possession basis. This proposition holds
discouraging residents or nationals from investing in           good in England because the decision in Harrison-
another Member State.                                           Broadley v Smith [1964] 1 AER 867 confirmed that
                                                                the rights enjoyed by a partner did not give rise to a
The ECJ has considered the case of German                       secure tenancy under the Agricultural Holdings Acts.
inheritance tax relief for agricultural and forestry            It may be that, in other EU Member States, it would
land. The relief was limited to agricultural and                be found that the rights enjoyed by a farming
forestry land situated in Germany. The son of a                 partnership or company were greater than under
deceased German resident who owned agricultural                 English law, and that the owner of land farmed in this
and forestry land situated in France, the full value of         way could not be said to enjoy the rights to vacant
which was subject to German inheritance tax,                    possession.
complained that if the land had been situated in
Germany, the German inheritance tax would have                  The greater area of contention would probably be
been based on only 10% of the market value. On the              property which under IHTA 1984 could not qualify at
death of a German resident, German inheritance tax              all for BPR. This could obviously include farmland
would be charged on assets outside Germany, as                  let to a tenant. Given the extensive political influence
well as those situated in Germany.                              enjoyed by farmers, in most EU Member States, and
                                                                in many cases a somewhat revolutionary tradition, it
The decision (ECJ)                                              would be surprising if many UK domiciliaries were
Articles 73b(1) and 73d of the EC treaty precluded a            keen to invest in farmland let to tenants, without a
national tax provision like that being considered,              very close and possibly expensive study of the
under which inheritance tax would be charged on the             respective legal rights and obligations of owners and
full market value of agricultural and forestry land             occupiers of farmland.
situated in another Member State, while being
charged on only 10% of the value of identical                   Perhaps the most likely area of contention, where a
domestic assets. (Theodor Jager v Finanzamt Kusel-              UK domiciliary might be unable to claim BPR, will be
Landstuhl (2008) EUCJ 256/06.                                   in relation to farmhouses. The active UK owner of
                                                                farmland in another EU country may be able to claim
Analysing APR in the light of Jager                             BPR in relation to the land, and be no worse off in
IHTA 1984 s115(5) does of course restrict APR                   relation to the land he is farming even though he is
under IHTA 1984 part V chapter II to agricultural               unable to claim APR. But, as is well known, HMRC
property situated in the UK, Channel Islands and Isle           are unwilling to allow BPR for the business
of Man. There is therefore clearly the possibility that         proprietor’s living accommodation. However, one of
a UK domiciliary might die leaving farmland situated            the requirements for obtaining APR, for a farmhouse,
in another EU country, the full value of which would            is that it should be occupied for the purposes of
be subject to IHT, while such property situated in the          agriculture. Practitioners will be all too aware of the
UK IHT would be charged on only the non-                        close attention paid by HMRC to this point, in
agricultural value, plus possibly only 50% of the non-          relation to farmhouses. If the farmhouse is situated
agricultural value if relief is only available at 50%.          outside the UK, in another EU country, and the
                                                                owner himself claims to be occupying it for the
Whilst the IHTA 1984 restricts APR to property                  purposes of agriculture, there may be a question as
situated in the UK itself and adjacent islands, there is        to whether his presence in that other Member State
no such geographical limitation for business property           has become so permanent that he has become
relief. For the UK purchaser of farmland in another             domiciled there. In this event, the farm, including the
EU country who will farm the land himself, there will           farmhouse will be excluded property for IHT
often be no practical difference between APR and                purposes and the question of whether it qualifies for
BPR. Both will in practice be available at the rate of          APR under IHTA 1984 will be academic.
100% after only two years. There may be problems
with farmland being held outside, but farmed by, a
                                                           30                                                April 2008
The ECJ judgment was handed down only on 17                     FB 2008 will raise this limit, but the changes will
January 2008. It is therefore hardly surprising that            have effect only when a Treasury Order is laid,
there has been no reaction from HMRC, though                    following State Aid approval of the change.
note that the judgment largely follows an opinion of
the Advocate General delivered on 11 September                  Qualifying activities
2007. There may, however, be another factor which               The venture capital schemes are intended to support
would prevent, or at least discourage, a challenge to           investment     in    smaller,  higher-risk,    trading
the present EU legislation. The provisions governing            companies. Most trades qualify under the schemes,
UK APR, and particularly those establishing the rate            but not those which consist to a substantial extent of
of relief, essentially represent legislation as enacted         listed ‘excluded activities’.
in 1992.The German legislation considered by the
ECJ seems to have been enacted in 1997. The                     These excluded activities are listed in the relevant
significance of the date is that an important change            legislation (for EIS – ITA 2007 s192; for VCTs – ITA
was made to the EC Treaty taking effect in                      2007 s303 for CVS – FA 2000 Sch 15 para 26).
1994.This was an issue discussed briefly by the                 Where necessary, more detailed explanation and
Advocate General, but not explored further because              definitions follow the list.
of the timing of the German legislation. Clearly this
would have to be explored in more detail if there               The proposed changes would, in each case, add
were a challenge to the UK provisions. It has to be             three new activities – shipbuilding, coal production
said, however, that the issue is not entirely clear cut.        and steel production – to the list, together with
The comments of the ECJ suggest that the type of                definitions. The definitions are based on those
restriction being discussed might have contravened              provided by the European Commission, for State Aid
EU law even if put in place before 1994.                        purposes.

(Trust and Estates February 2008 Vol 22 No 2,                   (HMRC Budget release BN16 13.3.08)
article by Richard Williams)
                                                                12.2    Budget 2008: Investment Manager
12.     RESIDUE                                                         Exemption (IME)

12.1     Budget 2008: Venture Capital                           Context
                                                                The IME enables non-UK residents, whether
         Schemes                                                companies, individuals or funds, to appoint UK-
                                                                based investment managers to carry out
Context                                                         transactions on their behalf without the risk of
Various changes are announced for investors under               exposure to UK tax, subject to meeting certain
the EIS, CVS and VCT schemes, companies which                   conditions. Two categories of change will be made,
qualify to attract investment under those schemes               benefiting investors.
and VCTs themselves.
                                                                Simplifying       the      approach      to   defining
Operative date                                                  transactions
For EIS, the changes to qualifying activities will have         The IME has effect for transactions meeting the
effect for shares issued on or after 6.4.08, but the            statutory definition of an ‘investment transaction’.
change to the investment limit can have effect only             For the future, HMRC will be able to make an order
once the European Commission has given approval.                designating transactions as ‘investment transactions’
When State Aid approval is received, the new limit              for the purposes of the IME. After the change there
will be brought into force but will have effect on and          will be a single list of transactions coming within that
after 6 April.                                                  definition and there will be no need to refer to the
                                                                current range of different statutory provisions, which
For CVS, the changes to the qualifying activities will          will be repealed. The list of eligible transactions will
have effect for shares issued on or after 6.4.08.               be available on the HMRC website, so that all
                                                                interested parties can see which transactions are
For VCTs, the changes to the qualifying activities will         covered.
have effect for money raised on or after 6.4.08 (but
not for money derived from the investment of money              Achieving proportionality
raised before that date).                                       At present where an investment manager carries
                                                                out, on behalf of a non-UK resident, a transaction
Current law and proposed revisions                              which does not qualify for the IME, one of the
EIS income tax relief and investment limit                      qualifying conditions can operate in a way which
The limit on the amount on which an individual can              means that no other transactions carried out by that
receive EIS income tax relief is currently in ITA 2007          investment manager for that non-UK resident are
s158(2).                                                        capable of qualifying for the IME, even where those
                                                                other transactions would themselves meet the
                                                                qualifying conditions. This can result in the non-UK
                                                                resident being exposed to UK tax on all the
                                                           31                                               April 2008
transactions carried out through the investment                  alternative investment funds (AIFs) and the other
manager. This measure will remove that condition                 dealing with Property Authorised Investment Funds.
and produce a more proportionate outcome. All                    The AIF changes will take effect on and after a date
transactions which meet the qualifying conditions will           to be set by Treasury Order, the date to be
qualify for the IME. If there are any non-qualifying             determined by the date the FSA regulatory changes
transactions, it will be only those transactions which           become effective. The second will take effect from
will be exposed to UK tax.                                       6.4.08.

(HMRC Budget release BN28 13.3.08)                               Funds of alternative investment funds: current
                                                                 law and proposed revisions
12.3    Budget 2008: Offshore Funds –                            Under the current regulations:
        New Tax Regime
                                                                       a gain made by an authorised investment
                                                                        fund on disposal of an interest in a non-
Context
                                                                        qualifying offshore fund is an offshore
An offshore fund is any type of fund which is resident
                                                                        income gain and will be subject to
outside the UK or established under foreign law and
                                                                        corporation tax in the fund; and
would, if it were established in the UK, constitute a
collective investment scheme for the purposes of the
Financial Services and Markets Act 2000.                               when an investor realises a gain by
                                                                        disposing of units in the fund, they may also
Where HMRC certify a fund as a qualifying fund, a                       be taxable on a capital gain.
test which must be satisfied each year, the fund
                                                                 Under the proposed new regulations:
must distribute at least 85% of its income. On
disposal of his interest the investor is liable to CGT
or corporation tax on chargeable gains instead of                      in the case of an authorised investment fund
income tax or corporation tax on income if the fund                     electing for the new tax treatment, the fund
were a non-qualifying offshore fund.                                    will be exempt from tax on offshore income
                                                                        gains; and
A ‘reporting’ rather than a ‘distributing’ fund                        an investor in a FAIF that had so elected
FB 2008 will provide powers to make regulations                         would then be chargeable solely to income
dealing with the taxation of investors in offshore                      tax on any gain made on disposal of units in
funds and the rules for allowing certain funds to be                    the fund.
classed as ‘reporting funds’, under which a fund will
be able to ‘report’ income to investors who will then            Property authorised investment funds: current
be subject to tax on the reported income.                        law and proposed revisions
                                                                 Under the current regulations:
The definition of what constitutes an offshore fund
will not be changed in FB 2008. The Government                         an AIF pays corporation tax (CT) on rental
intends to continue its discussions with industry on                    profit or other property income such as
this point and will legislate for a revised definition in               property income distributions from UK-REITs
FB 2009. Draft regulations will be published shortly                    or their foreign equivalents;
after the FB, which set out the conditions which an
offshore fund must fulfil to ensure that a disposal of                 any other taxable income received by an AIF
an interest is subject to CGT treatment. It is                          investing in property is treated in a similar
expected that the conditions for obtaining the                          way to property income;
new qualifying funds status will be less onerous,
and the tests required for this will be applied                        the income is distributed by the AIF, along
only at the outset (instead of, as now, annually).                      with any other income the AIF may accrue,
It is also envisaged that minor failures to keep to                     as a dividend carrying a tax credit;
the conditions will not result, as they do at
present,     in    the     fund      being    removed                  exempt recipients (such as pension funds
retrospectively from the more favourable regime.                        and charities) cannot reclaim the tax credit;
                                                                        and
(HMRC Budget release BN31 13.3.08)
                                                                       dividends received from UK companies are
12.4    Budget      2008:                Authorised                     not taxable in the AIF.
        Investment Funds
                                                                 Under the proposed new regulations:
Context
With a view to attracting non-UK resident investors                    an AIF which invests mainly in property and
to certain UK authorised funds, typically those                         certain related securities will be able to elect
investing in hedge funds or property, two measures                      for the Property AIF regime to have effect;
have been proposed, the one dealing with funds of
                                                            32                                               April 2008
       in a Property AIF rental profit and certain                   intended.   This    will  ensure    that,
        other property-related income will be exempt                  notwithstanding the wording of any
        from taxation in the fund. It will normally be                double taxation treaty, UK residents pay
        distributed to investors under deduction of                   UK tax on their profits from foreign
        tax. Basic rate taxpayers will have no further                partnerships; and
        tax liability, non-taxpayers and exempt
        bodies will be able to reclaim this tax, while               prevent tax avoidance through the
        higher rate taxpayers and some corporates                     misuse of Double Taxation Treaties by
        will have a further tax liability to pay;                     UK residents.

       other taxable income of the Property AIF will         Operative date
        also be distributed to investors under                The first measure will be treated as having always
        deduction of tax. Investors will similarly be         had effect. The second will have effect for income
        able to either reclaim the tax or incur a             arising on or after 12.3.08.
        further charge as appropriate; and
                                                              Current law and proposed revisions
       UK dividends which are currently not taxable          UK law taxes a UK resident beneficiary of certain
        in the fund will remain exempt, as they are           trusts on the income to which they are entitled under
        for all corporate recipients and will fund            the trust arrangement as it arises. This means that,
        dividend payments carrying a tax credit to            in cases exploiting the above avoidance scheme, the
        investors as at present.                              UK resident should be taxable in the UK on his or
                                                              her share of the profits of the partnership comprised
To qualify for the new regime Property AIFs will have         of the foreign trustees.
to meet certain conditions, including:
                                                              But the users of the scheme claim that a provision,
       incorporation as an open-ended investment             known as the Business Profits Article, common to
        company (subject to Financial Services                most tax treaties, exempts the partnership profits
        Authority regulation);                                from UK tax – not only in the hands of the foreign
                                                              partners but also in the hands of the UK
       carry on a property-investment business               beneficiaries.
        (amounting to at least 60% of the business);
                                                              The first provision will make clear that (in line with
       a ‘genuine diversity of ownership’ condition,         retrospective legislation introduced in F(No2)A 1987)
        so that the fund is not limited to or targeted        tax treaties do not exempt UK residents from UK tax
        at only a few specified investors; and                on any profits of a foreign partnership to which they
                                                              are entitled. The second measure will ensure that
       limits on the holdings of corporate investors         the Business Profits Article in the UK’s tax treaties
        and on the type and amount of loan                    cannot be read as preventing income of a UK
        financing in the fund.                                resident being chargeable to UK tax.

(HMRC Budget releases BN33 and 34 13.3.08)                    (HMRC Budget release BN66 13.3.08)

Draft guidance has been issued on the Property AIF            12.6    Budget 2008:    Power to Give
regime, to be finalised before the end of April                       Statutory Effect  to  Existing
                                                                      Concessions
(HMRC news release 27.3.08).
                                                              General description of the measure
12.5    Budget 2008:           Double Taxation                The decision in the case of ‘The Queen (on the
        Treaty Abuse                                          application of John Wilkinson) v The Commissioners
                                                              for Her Majesty’s Revenue and Customs’ made clear
Context                                                       that the scope of the discretion of HMRC to make
UK residents are taxable on their income wherever it          concessions from the strict application of tax law is
arises. A wholly artificial scheme seeks to avoid UK          not as wide as had previously been thought.
tax by artificially diverting income of a UK resident
individual to a foreign partnership comprised of              HMRC have been reviewing their concessions in the
foreign trustees. The scheme is designed to ensure            light of the Wilkinson judgment and that review is
that the income nonetheless continues to belong to            expected to be completed in the autumn. The
the UK resident as they will be a beneficiary of the          majority of HMRC’s concessions are clearly
foreign trust. FB 2008 will:                                  within the scope of their ‘collection and
                                                              management’ discretion and so can continue to
       clarify,   retrospectively,  legislation              operate as they are.
        introduced in 1987, which itself was
        retrospective, so that it has effect as
                                                         33                                              April 2008
Indications are that when the review is                        sources and establish which indices/databases
completed it will be possible to legislate a                   are most commonly used and meaningful.
substantial proportion of the remaining minority               Anastasia Tennant (Christies) raised a case she
and so enable the tax treatment they afford to                 was involved in where several siblings had been
continue. FB 2008 will provide for existing HMRC               given part shares in assets on the same date.
concessions (which include concessions operated by             The Inspector was seeking to value each part
HMRC’s predecessor departments of Inland                       share in isolation which would result in a
Revenue and HM Customs & Excise) to be made                    discounted acquisition value for the siblings.
statutory by Treasury Order. Details of the outcome            This seemed to her not to be right and the
of the review, including those extra statutory                 siblings’ acquisition value should be a fractional
concessions to be legislated by order, will be                 share of the whole with no discount.
available later in the year.
                                                               Mike Fowler explained that in CG cases the
Operative date                                                 Inspector is responsible for advising SAV what to
This power will be operative on and after the date             value. If there is any dispute as to what should be
that FB 2008 receives Royal Assent, but no orders              valued it is up to the Inspector to resolve. As regards
under this power are expected to be made until after           the scenario mentioned he said that he had taken
HMRC’s review of their concessions has been                    advice and, on the facts as reported, HMRC capital
completed.                                                     gains specialists agreed that the Inspector
                                                               appeared to be wrong and no discount was in
Current law and proposed revisions                             point. In general terms he said that any
At present there is no enabling power of this kind to          disagreement over the valuation requirement could
allow existing concessions to be legislated by order.          be drawn to the attention of the SAV valuer who
                                                               would then consult the instructing office.
In the context of this measure:
                                                               Anastasia Tennant and Susan Johnson (Christies)
       ‘existing HMRC concession’ - means any                 asked why, when valuing for CG purposes at
        statement made by HMRC (before the                     31.3.82, HMRC feel that joint ownership discounts
        enactment of this measure) which allows a              are appropriate even when the joint owners were
        person a reduction in liability to tax or duty,        happily married at that time. Anastasia Tennant
        or allows any other concession in relation to          noted that until 5 April 1990 the CGT legislation
        tax or duty to which there is no legal                 mostly treated spouses as a single unit: disposals
        entitlement; and                                       between spouses were at no loss/no gain; there was
                                                               joint taxation; the annual exemption was shared; the
       ‘statement’ - means statement of any sort              loss of one spouse could be set against the gains of
        however described.                                     the other.
Any order under this power will be made only if a
                                                               Mike Fowler drew attention to paragraph 7.24 of the
draft of that order has been laid before, and has
                                                               Valuation Office Agency Operational Instructions
been approved by a resolution of, Parliament.
                                                               which explains the reasoning.
(HMRC Budget release BN95 13.3.08)
                                                               Susan Johnson noted that for CG purposes, the
12.7    Chattels Valuation: HMRC’s Fiscal                      actual acquisition price is used if a chattel was
                                                               bought jointly after March 1982, but a discounted
        Forum                                                  joint ownership price is applied if a chattel was
                                                               purchased before March 1982 and the taxpayer
On HMRC’s website can be viewed the minutes from               elects for rebasing to apply. Mike Fowler said
both November 2006 and, most recently, November                this is a widely acknowledged feature of the
2007 meetings. From the latter:                                legislation but, again, it is for the Inspector to
                                                               advise SAV of the exact valuation requirement.
Use of indices                                                 He drew attention to the Lands Tribunal case of
Mike Fowler (Shares and Assets Valuation Team)                 Hatt v Newman (2001) where the Tribunal agreed
gave a brief recap from the last Chattels Valuation            a 10% discount when valuing a husband and wife
Fiscal Forum which concluded that, whilst indices              joint interest at 31 March 1982. The CG Manual
such as Art Market Research (AMR) and ArtNet are               gives detailed guidance about March 1982
not perfect, they can be useful in recording market            valuations.
trends. He advised that SAV had not received details
of any further databases since the last meeting. He            Anastasia Tennant noted that Mr Hatt had
explained that indices are one of the tools used by            represented himself against the Revenue Solicitor
SAV when risk assessing cases, particularly if an              and the expert witness was a valuer from the VOA.
item has been sold and SAV need to establish if the
proposed 1982 value looks reasonable. SAV are                  Nick Parnell asked if the usual discount for 50:50
keen to keep abreast of the latest information                 ownership cases was around 10% in both IHT and
                                                          34                                               April 2008
CGT cases. Mike Fowler confirmed that this was the                  The value of UK imports from countries
case and drew attention to the minutes of the Shares                 outside the EU increased by £2,686m (2%).
Valuation Fiscal Forum held on 12 October 2004                       Nine of the 12 regions and countries of the
(link above).                                                        UK saw increases, with the largest increase
                                                                     in Yorkshire and The Humber (£1,326m).
(HMRC Chattels Valuation Fiscal Forum minutes of                     The largest percentage increase was in the
meeting on 14 November 2007).                                        North East (44%).

                                                             Comparison of Exports and Imports between 2006
12.8    Tax Law Rewrite Project                              and 2007 are affected by changes in trade
                                                             associated with VAT carousel fraud (MTIC) and by
Transactions in land – response document                     EU enlargement in January 2007.
HMRC have published a response document
containing summaries of the documents received on            (HMRC news release 6.3.08)
the draft clauses published with Paper CC/SC (07)
29. The document also shows how HMRC have
dealt with the comments received.                            12.10 Equitable             Jurisdiction           and
                                                                   Mistakes
Minutes published
The Minutes of the February Meeting of the                   Context
Consultative Committee and the March Meeting of              Re Griffiths [2008] EWHC 118 (Ch) is an interesting
the Steering Committee have now been published.              case which, on the right facts, might be
                                                             extremely useful in allowing taxpayers to escape
(HMRC What’s New? 7.3.08 & 20.3.08)                          from the consequences of their actions in certain
                                                             circumstances.
12.9    UK Regional Trade Estimates for
        2007                                                 The court has an equitable jurisdiction, which allows
                                                             it to set aside a voluntary disposition where a donor
Context                                                      shows that he made the disposition as a result of a
UK Regional Trade in Goods estimates were                    mistake so serious as to render it unjust on the part
released on 6.3.08, for the fourth quarter of 2007.          of the donee to retain the property given to him. The
                                                             jurisdiction is similar to the Hastings-Bass jurisdiction
Exports                                                      and was used comparatively recently in Wolff v Wolff
                                                             [2004] STC 1633, where taxpayers had entered into
    The total value of UK exports for the 12
                                                             a complex tax planning exercise which they had not
       months ending December 2007 was
                                                             understood and which would have rendered them
       £218,919m.
                                                             homeless.
    The total value of UK exports for the 12
       months ending December 2007 fell by
                                                             Re Griffiths: the facts
       £24,902m (10%) compared to the 12 months
                                                             Mr Griffiths, aged 73, received tax planning advice,
       ending December 2006.
                                                             as a result of which he made three substantial PETs,
    The value of UK exports to the EU
                                                             hoping to survive for seven years (or at least three
       decreased by £25,595m (17%) in the same
                                                             years, in which case the IHT due on the lifetime gifts
       period. Northern Ireland was the only
                                                             would have been reduced by IHT tapering relief). He
       country of the UK which had an increase.
                                                             made two transfers in April 2003 and one in
    The value of UK exports to countries outside            February 2004. In autumn 2004, he was diagnosed
       the EU increased by £693m (1%).                       as having lung cancer and, in April 2005, he died.
There were increases in five regions and countries of        All three PETs became chargeable to IHT and the
the UK with the largest increase in North East               tax payable exceeded £1 million. Mr Griffiths also
(£1,133m).                                                   made a Will under which he left a life interest in his
                                                             residuary estate to his widow. If, therefore, he had
Imports                                                      not made the transfers, there would be no IHT
    The total value of UK imports for the 12                immediately payable.
       months ending December 2007 was
       £308,689m.                                            The executors sought to set aside the transfers on
    The total value of UK imports for the 12                the ground that they were made under a mistake. Mr
       months ending December 2007 rose by                   Griffiths mistakenly believed, at the times of the
       £6,725m (2%) compared to the previous 12              transfers, that there was a real chance that he would
       months.                                               survive for seven years, whereas in fact at that time
    The value of UK imports from the EU                     his state of health was such that he had no real
       increased by £4,039m (2.5%) in the same               chance of surviving that long. Had he known that his
       period. Decreases were only seen in the               life expectancy was so short he would not have
       North West, London and Wales.                         made the transfers, and so they should be declared
                                                             void or set aside.
                                                        35                                               April 2008
                                                                 The issue in this case was whether a letter of wishes
The medical evidence was that Mr Griffiths was not               written by the settlor to the trustees of a family
suffering from cancer in 2003, but he was in 2004.               discretionary trust was confidential.
The decision: ChD (Lewison J)
A mistake of fact is capable of bringing the                     Breakspear and Others v Ackland and Another:
equitable jurisdiction into play provided it is                  the decision
sufficiently serious. It was then necessary to                   In the absence of special terms, the
show that, if Mr Griffiths had been aware of the                 confidentially in which a wish letter was enfolded
true facts, he would not have acted as he did.                   was something given to the trustees for them to
                                                                 use, on a fiduciary basis, in accordance with
On the facts, there was no evidence that the                     their best judgment and as to the interests of the
transactions in 2003 were made under a mistake. Mr               beneficiaries and the sound administration of the
Griffiths was not ill at the time the gifts were made.           trust.
However, the 2004 gift was different. Had he known
in February 2004 that he was suffering from lung                 Disclosure of the letter of wishes to the claimant
cancer, he would also have known that his                        beneficiaries was ordered.
chance of surviving for three years, let alone for
seven years, was remote. In those circumstances                  Briggs J turned to the question whether, and, if so, in
he would not have acted as he did. It was                        what way, the principle in In re Londonderry’s
appropriate to set the 2004 disposition (of £2.6m)               Settlement ([1965] Ch 918) that the process of the
aside.                                                           exercise of discretionary powers by trustees was
                                                                 inherently confidential, and that that confidentiality
Additional points worth noting:                                  existed for the benefit of the beneficiaries rather than
(1) Quite apart from the fact that there was no                  merely for the protection of the trustees, applied to
mistake in relation to the 2003 dispositions, the                wish letters.
Judge said that he would have refused to set aside
one of them because it was a joint disposition by Mr             In that context, he confined himself to wish letters
and Mrs Griffiths, and Mrs Griffiths had not applied             arising in the context of family discretionary trusts.
for it to be set aside. Counsel said that she would be           Generally, the confidence which ordinarily attached
happy to make such an application but she had not                to a wish letter was such that, for the better
done so and, even if she had, it would have been                 discharge of their confidential functions, the trustees
necessary to show that she too made a relevant                   need not disclose it to beneficiaries merely because
mistake.                                                         they requested it unless, in their view, disclosure
                                                                 was in the interests of the sound administration of
(2) Was the disposition void or merely voidable? It              the trust, and the discharge of their powers and
made a difference because the executors had paid                 discretions.
IHT on a provisional basis. If the assignment was
void, they were entitled to interest on the overpaid             His conclusion that, in general, wish letters fell within
tax as from the date on which they made the                      the Londonderry principle made it unnecessary to
payments (IHTA 1984 s235), whereas if it was                     decide whether wish letters fell into any of the
voidable, interest was only payable from the date                Londonderry excluded categories.
when a claim to repayment was made (IHTA 1984
ss150 and 236(3)). The Judge held that, as the                   (Breakspear and Others v Ackland and Another
jurisdiction is to relieve against the consequence of a          10.3.08 reported in The Times 10.3.08 p55)
mistake, unless and until the transaction is set aside
(or relief is given), it has legal effect. In other words        12.12 Money Laundering Regulations:
the transaction is voidable rather than void ab initio.                Deadline Extended
Note that the application was not opposed by the                 Further to MTR 3/08 Item 12.2, the deadline for Trust
donees. HMRC were asked whether they wished to                   or Company Service Providers to register has been
intervene in the proceedings in view of the large                extended from 1 April to 31 May 2008.
amount of tax potentially involved. They declined to
do so, although asked for certain authorities to be              (Revenue & Customs Brief 18/08 26.3.08)
brought to the court’s attention. There was,
therefore, no adversarial argument either on the law
or on the facts.

(The Law Society’s Gazette 6.3.08 p26 article by
Professor Lesley King, College of Law, London)

12.11 Letters of Wishes: The Issue of
      Confidentiality
Context

                                                            36                                                 April 2008
APPENDIX

HMRC press     releases,   notes,   notices   and          Revenue and Customs Business Briefs
statements
                                                           1.     VAT: Access to Intrastat Data (13/08 4.3.08)
Note that the Budget Press Notices are not                 2.     Animal rescue charities - VAT liability of the
listed.                                                           sale of abandoned dogs and cats (14/08
                                                                  4.3.08)
1.    HMRC Chattels Valuation Fiscal Forum                 3.     Money Laundering Regulations (MLR) 2007:
2.    Beneficial loan arrangements – official rates               How HMRC will handle late applications to
      (3.3.08)                                                    apply to re-register under the MLR 2007
3.    Stamp Taxes – Stamp Duty Land Tax Policy                    (15/08 5.3.08)
      and Processing Organisational Chart                  4.     Valuation of imported goods: Customs
      (4.3.08)                                                    valuation declarations and general valuation
4.    Stamp Taxes – SDLT Practitioners News                       statements (16/08 11.3.08)
      (4.3.08)                                             5.     Follow up and reminder to new Notice 75
5.    Tax Law Rewrite: Transactions in land –                     ‘Fuel for Road Vehicles’, issued on 8
      response document (7.3.08)                                  January 2008, on changes to some vehicle
6.    Draft Guidance on excepted transfers and                    categories from 1 April 2008 (17/08 13.3.08)
      settlements (7.3.08)                                 6.     Important news for Trust or Company
7.    Latest UK regional trade estimates (7.3.08)                 Service Providers (TCSPs) about changes
8.    Employment Income Manual (7.3.08)                           to Registration Guidance and when to
9.    Budget 2008 changes to Stamp Duty, Stamp                    register with HMRC (18/08 26.3.08)
      Duty Land Tax and Stamp Duty Reserve
      Tax (14.3.08)
10.   New deadlines for filing returns and paying          The Crown copyright material in this publication
      tax online (14.3.08)                                 is reproduced with the permission of the
11.   Salary sacrifice (17.3.08)                           Controller of Her Majesty’s Stationery Office.
12.   Offshore bank accounts (17.3.08)
13.   CGT reform – amended FAQ (17.3.08)
14.   Stamp Taxes – dealing with missing UTRNs             The extracts reported from HMRC’s IHT
      (withdrawal of priority fax process) –               Newsletter have not been approved by HMRC.
      (17.3.08)                                            For the precise words of the original article,
15.   FAQs: residence and domicile (17.3.08)               reference should be made to the original
16.   Does claiming tax credits affect my level of         publication. The extract should be read subject
      benefits? (18.3.08)                                  to the qualifications mentioned therein, to which
17.   Changes to the P46 reporting requirements            reference should be made before reliance is
      from April 2008 (19.3.08)                            placed upon an interpretation.
18.   Doing PAYE online all year round (19.3.08)
19.   Benefits and Expenses Sub Group Minutes
      (19.3.08)                                            YOU SHOULD NOT ACT (OR OMIT TO ACT) ON
20.   HMRC: Change Programme (19.3.08)                     THE BASIS OF THIS REVIEW WITHOUT
21.   Corporation Tax on chargeable gains:                 SPECIFIC PRIOR ADVICE. WHILE I NO LONGER
      indexation allowance: February 2008                  PROVIDE A CONSULTANCY SERVICE, I CAN
      (20.3.08)                                            DIRECT YOU TO AN APPROPRIATE SOURCE OF
22.   Tax Law Rewrite (20.3.08)                            ADVICE.
23.   Changes to the PAYE regulations to deal
      with issues highlighted in the Demibourne
      case (20.3.08)
24.   Finance Bill: Impact Assessments (27.3.08)
25.   Property Authorised Investment Funds                                  Matthew Hutton
      (Property AIFS): Draft Guidance (27.3.08)                               Broom Farm
                                                                               Chedgrave
                                                                           Norwich NR14 6BQ

                                                                           Tel: 01508-528388
                                                                           Fax: 01508-528096
                                                                     E-mail: mhutton@paston.co.uk
                                                                       www.matthewhutton.co.uk




                                                      37                                             April 2008

								
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