Tax Bulletin Issue 27

INLAND REVENUE TAX BULLETIN
Issue 27

CONTENTS

Deduction of Tax and Tax Relief at Source (No longer relevant)

Operating PAYE on Awards of Tradeable Assets (Article deleted since index 2004)

Schedule E: Cases II & III:

Location of Appeal Hearings

Self Assessment:

Farming: BSE Compensation

interpretations

Capital Gains Tax:

Inheritance Tax:

Schedule D Cases I & II:

miscellaneous

Capital Gains Tax:

Tax Treaty Update (Article deleted since index 2004)

Information available on the Internet (Article no longer current)

Change of Title and Address:

Statements of Practice and Extra-Statutory Concessions

EDITORIAL

This issue of Tax Bulletin includes a copy of the Tax Bulletin Special Edition. This provides a general commentary on the Self Assessment provisions of the 1996 Finance Act updating earlier versions of the SAT guides. I am pleased to be able to provide this information as part of the Department's commitment to working with practitioners to ease the introduction of Self Assessment.

I would also like to remind readers that future issues of Tax Bulletin will only be sent to those on the 1997 subscription list. A copy of the subscription form is included on page 403.

(No longer relevant)
DEDUCTION OF TAX AND TAX RELIEF AT SOURCE

The taxes acts require various payments to be made after deduction of income tax. In addition, a number of tax reliefs are given at source by reducing the amounts paid. And certain forms of income are treated as though they have already borne income tax when they are received, although such tax is not repayable.

Last November's Budget included the proposal to reduce the basic rate of income tax to 23 per cent. This change is intended to take effect from 6 April 1997.

Assuming the Budget proposal becomes law some of the rates at which income tax is deducted, or relief is given at source, or tax is treated as having been borne, will change for the next tax year. This article sets out the rates applicable for the next tax year and provides background information about some related Budget changes.

Payments under deduction of tax.

From 6 April (except where indicated) where any person is required, or entitled, under the Taxes Acts to deduct income tax from payments made or received the rate at which income tax is to be deducted is set-out overleaf:

PAYMENT                                         RATE
Interest paid by banks and other deposit-takers
(Section 480A Income and Corporation Taxes Act
(ICTA) 1988)                                           20%
Interest paid by building societies (Regulation
3 Statutory Instrument (SI) 1990 No. 2231)             20%
Interest on National Savings FIRST Option Bonds
(Section 118E ICTA 1988)                               20%
Interest on UK Government securities (Section 118E
ICTA 1988) 20%
Interest on other securities (Section 349 ICTA 1988)   20%
Interest distributions by UK authorised unit trusts
(Section 349 ICTA 1988)                                20%
Interest on cash deposits withdrawn from PEPs
(Regulation 17A SI 1989 No. 469)                       20%
Other annual interest payable under deduction of
tax, including interest paid by companies
(Section 349 ICTA 1988)                                20%
Annual payments (including charges on income,
such as payments under deeds of covenant to
charities, and distributions by unauthorised unit
trusts) (Sections 348 and 349 ICTA 1988)               23%
The income element of purchased life annuities
(broadly those within Section 656 ICTA 1988)
(Section 349 ICTA 1988)                                20%
Other annuities (where PAYE does not apply)
(Sections 348 and 349 ICTA 1988)                       23%
Dividends and interest on foreign shares and
securities paid by paying agents or collected by
collecting agents (Section 118E ICTA 1988)             20%
Foreign annual payments made by paying agents or
collected by collecting agents (Section 118E ICTA
1988)                                                  23%
Interest on UK Eurobonds collected by collecting
agents (Section 118E ICTA 1988)                        20%
Rental income of non-resident landlords
(Section 42A ICTA 1988)                                23%
Patent royalties (Sections 348 and 349 ICTA 1988)      23%
Copyright royalties where the owner is abroad
(Section 536 and Section 349 ICTA 1988)                23%
Public lending rights where the owner is abroad
(Section 537 and Section 349 ICTA 1988)                23%
Design royalties where the owner is abroad
(Section 537B and Section 349 ICTA 1988)               23%
Payments made before 1 July 1997 to uncertificated
sub-contractors who do not hold a valid exception
(714) certificate (Section 559 ICTA 1988)              24%
Payments made on or after 1 July 1997 to
uncertificated sub-contractors who do not
hold a valid exception (714) certificate
(Section 559 ICTA 1988)                                23%
Payments to foreign entertainers and
sportsmen -- subject to any application for a
reduced payment (Section 555 ICTA 1988)                23%
Payments out of pension scheme AVC surpluses made
by scheme administrators -- see below
(Section 599A ICTA 1988)                               33%

ELECTRIC LINE WAYLEAVES

Under a Budget proposal rents paid in respect of electric line wayleaves are generally no longer to be paid after deduction of tax. Except where rents fall within the arrangements for non-resident landlords, payers who currently deduct tax from wayleave payments should not do so for payments made on or after 6 April 1997.

NATIONAL SAVINGS

Interest on National Savings investments which is taxable will continue to be paid gross, apart from interest on FIRST Option Bonds which will continue to be paid after deduction of tax at the lower rate.

Interest on Index-linked Savings Certificates, Fixed Interest Savings Certificates and Children's Bonus Bonds and the first £70 of interest on National Savings Ordinary Accounts will continue to be exempt from tax.

Interest on all other National Savings investments, whether paid gross or after deduction of tax, continues to be taxable at the 20 per cent lower rate, or at 40 per cent for a higher rate taxpayer.

PAYMENTS TO CHARITY UNDER DEED OF COVENANT

Most covenants provide for a 'net' payment, that is a sum which after deduction of tax at the basic rate is equal to £X. The change in the basic rate will not affect the amount paid by the individual to the charity. However, a payment of £76 which, at present, represents £100, less tax at 24 per cent, will from 6 April represent £98.70, less tax at 23 per cent. Any higher rate tax relief due to the payer will be given on £98.70.

Some covenants provide for payment of a 'gross' amount, for example £Y, less tax. If the payment is £100 the payer must at present deduct £24. From 6 April he or she must deduct £23, increasing the payment to the charity from £76 to £77. Higher rate relief will continue to be given on the gross amount (£100 in this example).

For individuals the rate at which tax is to be deducted from a payment under a covenant is the basic rate for the year in which the payment is due. So where a payment due in 1996-97 is paid on or after 6 April 1997 the 24 per cent rate will apply. (Exceptionally, where a payment is not made wholly out of profits or gains brought into charge to income tax at the basic rate, the rate at which tax is to be deducted is the basic rate for the year in which the payment is made.)

Where someone who pays tax only at the lower rate makes a payment under a deed of covenant (or under the Gift Aid scheme) the lower rate tax will not wholly cover the basic rate tax deducted from the payment. That person's tax office may take steps to recover the difference.

For companies (including companies owned by charities making covenanted donations to their parent charity) the tax rate is the basic rate for the year in which a payment is made, even where the payment was due in an earlier year.

PAYING AGENTS AND COLLECTING AGENTS -- FOREIGN WITHHOLDING TAX

The amount of income tax deducted from foreign income by paying and collecting agents is reduced in some circumstances to take account of foreign withholding tax already paid.

TAX RELIEF AT SOURCE SCHEMES

From 6 April where an individual is entitled under the Taxes Acts to tax relief when making any payment the rate at which relief is to be given is as follows:

PAYMENT                             RATE
Interest on a home loan
(under MIRAS)
(Section 369 ICTA 1988)                  15%
Interest on a loan used to buy
a life annuity (under MIRAS)
(Section 369 ICTA 1988)                  23%
Private medical insurance
(Section 54 FA 1989)                     23%
Vocational training relief
(Section 32 FA 1991)                     23%
Life assurance premium relief
(Section 266 ICTA 1988)                  12 1/2%
Free-standing AVCs
(Section 593 ICTA 1988)                  23%
Contributions to approved
personal pension schemes
(Section 639 ICTA 1988)                  23%

INCOME WHICH IS TREATED AS HAVING BORNE TAX

The Taxes Acts treat certain forms of income as though they have already borne income tax when they are received. Such tax is not repayable. From 6 April income tax will be treated as having been borne at the following rates:

INCOME                            RATE
Foreign income dividends
(including deemed foreign
income dividends)
(Section 246D ICTA 1988)                20%
Stock dividends
(Section 249 ICTA 1988)                 20%
Certain chargeable event gains
(Section 547 ICTA 1988)                 23%
Loans to participators which
are waived Section 421 ICTA 1988)       20%
Payments out of pension fund AVC
surpluses received by employees
(Section 599A ICTA 1988)                23%

If an individual receives a stock dividend of, say, £80 the dividend will be treated as having borne tax of £20 out of income of £100. An individual who is not liable to tax will not be able to claim any repayment. An individual liable at the lower rate or the basic rate will have no further tax to pay. An individual liable at the higher rate will have to pay further tax of £20, being the liability of £40 on the income of £100 less the £20 of tax treated as having been borne.

The treatment of chargeable event gains is slightly different. If an individual liable at the higher rate receives a gain of, say, £800 on a non-qualifying life policy (and the policy is not of a type on which a basic rate tax charge arises) tax is due at the difference between the higher rate and the basic rate, so the tax due will be £800 at 17 per cent = £136.

COMPANIES BUYING THEIR OWN SHARES OR PAYING SPECIAL DIVIDENDS

Under proposals announced on 8 October 1996 distributions made on or after that date, where a company buys its own shares or where certain special dividends are paid, are deemed to be foreign income dividends. Such distributions are therefore treated as though they have borne income tax at the lower rate of 20 per cent. This tax is not repayable.

SURPLUS EMPLOYEE AVCS

Payments by occupational pension schemes of surplus employee AVCs (additional voluntary contributions) are currently subject to a special tax charge on the scheme administrator at the rate of 34 per cent. The scheme member is then deemed to have received the payment net of tax at the basic rate. From 6 April the pension scheme administrator should deduct tax at a rate of 33 per cent from such payments. The amount received by the scheme member will be treated as if tax at 23 per cent has been deducted.

ADVANCE CORPORATION TAX -- DIVIDENDS AND OTHER DISTRIBUTIONS

The value of the tax credit accompanying a dividend or other qualifying distribution (apart from a foreign income dividend or deemed foreign income dividend) paid by a UK company will continue to be 20 per cent of the value of the dividend plus the tax credit. Companies should continue to account for Advance Corporation Tax (ACT) of 20/80 on dividends and other qualifying distributions.

TAX-EXEMPT SPECIAL SAVINGS ACCOUNTS (TESSA)

An investor is permitted to withdraw funds from a TESSA, without the TESSA losing its tax exempt status. But the amount that may be withdrawn is limited to the equivalent of the "net" interest and bonuses earned on the account. The "net" interest and bonuses will continue to be 80 per cent of the total interest and bonuses earned. (Total less tax at the lower rate of 20 per cent.)

THE RATE APPLICABLE TO TRUSTS

The income and capital gains of discretionary and accumulation trusts are chargeable to tax at the rate applicable to trusts (34 per cent for 1996-97). When trustees make income payments to beneficiaries, the beneficiaries are chargeable to income tax at their normal rates and get credit for the tax paid by the trustees at the rate applicable to trusts.

For 1997-98 the rate applicable to trusts will remain at 34 per cent.

DEDUCTING TAX AT THE WRONG RATE

If tax is deducted at the wrong rate when a payment is made the payer should whenever possible seek to rectify the situation with the recipient of the payment. If too much tax has been deducted, the balance should be repaid to the recipient. If not enough tax has been deducted, the recipient should be asked to repay the balance or the shortfall should be collected by adjusting the next payment made, if possible.

INTEREST ON GILTS AND QUARTERLY ACCOUNTING

Companies, Lloyd's syndicates and certain other concerns may, if they wish, receive interest on gilts gross through the STAR account scheme. If they do, they have to account for tax on a quarterly basis. Where gilt interest is received gross these concerns should continue to account for tax at the lower rate of 20 per cent.

TAXATION OF SAVINGS INCOME

Savings income, such as interest and dividends, is taxable at the lower rate of 20 per cent rather than at the basic rate, except for higher rate taxpayers. It is treated as the top slice of a person's income (after any chargeable event gains or employment termination payments).

A NON-TAXPAYER is entitled to repayment of all the tax actually deducted from savings income and will have no further tax to pay on savings income received gross. (Tax that is treated as having been borne -- for example, on foreign income dividends -- is not repayable.)

A TAXPAYER LIABLE AT THE LOWER RATE is entitled to repayment of the tax actually deducted from any savings income which falls below the threshold for the lower rate band, but is not entitled to repayment of the tax deducted from income which falls above that threshold. And he or she has to pay tax at the lower rate on any savings income received gross which falls above that threshold.

A TAXPAYER LIABLE AT THE BASIC RATE is not entitled to repayment of the tax actually deducted from any savings income which falls within the lower rate band or the basic rate band. He or she has no further tax to pay on savings income received under deduction of tax but is taxed at the lower rate on any savings income received gross.

For A TAXPAYER LIABLE AT THE HIGHER RATE the tax charge on any income, including savings income, falling above the higher rate threshold (£26,100 for 1997-98) remains at the higher rate of 40 percent.

! This Article Is No Longer Current (Deleted Index 2004)

OPERATING PAYE ON AWARDS
OF TRADEABLE ASSETS

BACKGROUND

Legislation was introduced in the Finance Act 1994 to discourage employers from using artificial means of providing cash to employees in order to avoid the operation of PAYE. The legislation extended the scope of PAYE, applying it to assessable income provided in the form of "tradeable assets" and some vouchers. The legislation is now at Sections 203F-L Income and Corporation Taxes Act (ICTA) 1988. Certain shares were specifically excluded from the definition of "tradeable assets" by regulations (at Statutory Instrument (SI) 1212/1994 para.3).

Tax Bulletin Issue 11 (May 1994 page 212) included an article on the 1994 provisions and addressed some of the practical considerations of operating PAYE. This article provides an update on the position following further changes announced in last Novembers Budget (see also Inland Revenue Budget Day news release REV18).

NEW REGULATIONS

The exclusion for certain shares has been restricted. New regulations (SI 2969/1996) introduced with effect from 27 November 1996, limit the exclusion from the definition of "tradeable assets" to:

  • any shares, or right over or interest in shares, acquired by the employee, whether or not as a result of the exercise of an option, under a Revenue approved scheme; and
  • any shares acquired by the employee as the result of the exercise of a right over shares obtained before 27 November 1996;

where the shares in question are part of the ordinary share capital of the employer company or a company which controls the employer company.

PAYE must therefore be operated on any award of assessable income provided in the form of shares, provided outside an approved scheme, where the shares are tradeable assets. This includes shares acquired on the exercise of an option where this gives rise to a charge under Schedule E. Shares will be tradeable assets if:

  • the shares can be sold or otherwise realised on a recognised investment exchange, such as the Stock Exchange; or
  • trading arrangements are in place in respect of the shares at the time the assessable income is provided.

OPTIONS GRANTED BEFORE 27 NOVEMBER 1996

The new regulations exclude from the definition of tradeable assets all shares acquired as the result of the exercise of a right over shares obtained before 27 November 1996. Whether a right over shares existed at 27 November 1996 is a question of fact. Options over shares are rights over shares, other interests are not. In particular, interests acquired under long term incentive plans will not usually be a right over a share within the terms of the regulations.

TRADING ARRANGEMENTS

Trading arrangements are any arrangements for the purpose of enabling the person to whom the asset is provided to obtain an amount greater than, equal to or not substantially less than the expense incurred in the provision of the asset. They include arrangements put in place by employers, employee share ownership trusts or other bodies to create a market in the shares of an unlisted company.

WHAT ABOUT EX-EMPLOYEES?

Where an award of tradeable assets gives rise to a charge under Schedule E the employer is responsible for operating PAYE. This remains the case even if the employee has left the employment in respect of which the award was made. The employer under whom the employee held the employment in respect of which the award was made is responsible for operating PAYE.

HOW MUCH IS SUBJECT TO PAYE?

Where assessable income is provided in the form of tradeable assets the amount on which PAYE must be operated is as follows:

  • where the asset is one which can be sold or otherwise realised on a recognised investment exchange -- the amount for which it is capable of being sold or realised on that exchange;
  • where the asset is one for which trading arrangements are in place -- the amount obtained by the employee under those arrangements.

PAYE should be applied to the amount of income which will be taxed under Schedule E. Employers should not operate PAYE on an amount greater than the Schedule E income concerned.

OPERATION OF PAYE

Where should payments be recorded?

Payments in the form of 'tradeable assets' (known as 'notional payments') should be entered on the deductions working sheet, or equivalent payroll record, for the pay period in which the date of the notional payment occurs. Tax should be calculated in the normal way, usually on a cumulative basis.

What can the tax be deducted from?

Tax on the notional payment must be deducted from any actual payments made at the same time as the notional payment, and from any other actual payments paid later in the same pay period (such as monthly salary). This tax is deducted in addition to tax on the actual payment and other deductions including NICs. If both a notional and an actual payment are made at the same time then for the purpose of calculating the tax on the notional payment it should be treated as the top slice of pay.

What if the employee has a K code?

Where a K code is being operated, the 50% overriding limit on the tax that can be deducted from any payment, should be ignored when calculating the deduction from any actual payment in respect of notional payments. Similarly, if the tax on the notional payment is more than the actual pay, then no attempt should be made to collect any tax which could not be deducted in the immediately preceding period because of the 50% overriding limit. Instead, any excess from the preceding pay period which arose because of the K code should be carried on to the following pay period in the normal way.

What if it is not possible to deduct all the tax on the notional payment?

All the tax due on the notional payment has to be accounted for to the Collector (along with ordinary PAYE deductions for that period) 14 days after the end of the period in which the notional payment was paid.

What if the employee does not make good any tax which could not be deducted from pay?

If all the tax could not be deducted from the employee's pay, then there will be a further Schedule E charge under Section 144A ICTA 1988 on that amount unless it is made good to the employer within 30 days of receiving the notional payment.

What should be included in end of year pay and tax details?

Care needs to be taken, particularly where a non-cumulative code has been used, when completing end of year forms (P14, P35 and P60), and where appropriate P45s, to include the notional payment in pay, and to include all the tax which has been paid to the Collector in the year in tax details (whether or not the employee has made good to the employer any tax on a notional payment that it was not possible to deduct from pay).

What should be entered on Forms P9D AND P11D?

Notional payments, where PAYE has been applied, should not be included on form P11D. However, any charge which arises under Section 144A ICTA 1988 should be recorded on form P11D or P9D as appropriate. The employer will need to make sure that all necessary records (of tax deducted, tax accounted for, and the date and amount of any employee reimbursements to the employer) are kept so that this income can be reported.

What should be returned under Self Assessment?

An employee within Self Assessment should return notional payments where PAYE has been operated with other income recorded on form P60 on the Employment pages of the Self Assessment return. Any assessable income provided in the form of shares should be returned on the Share Schemes pages whether or not PAYE has been operated. A Helpsheet (IR218) will be available with the Self Assessment Return to explain what figures are to be included.

National Insurance Contributions

Parallel changes to National Insurance Contribution (NIC) regulations have been introduced with effect from 5 December 1996 (SI 1303/1996). The NIC changes are explained in issue number 7 of Contributions Agency NI News, available from Contributions Agency Customer Service Managers in Contributions Agency offices or from:

Marketing Press and
Publicity Manager
Room 76D
Contributions Agency
Department of Social Security
Longbenton
Newcastle upon Tyne
NE98 1YX.

(Article deleted since index 2002)

SCHEDULE E:
CASES II & III:
TAX EQUALISATION PAYMENTS

An individual who comes to the UK from abroad to take up employment in the United Kingdom for a period, but who remains not ordinarily resident here, is chargeable to tax on the emoluments from his employment for duties performed in the UK under Case II of Schedule E, and under Case III of Schedule E on emoluments for duties performed outside the UK to the extent that such emoluments are remitted. Where duties are performed both in and outside the UK the employment income is usually split between Case II and Case III on a time-apportionment basis by reference to days spent working in UK and overseas.

In addition to salaries and benefits, employers may also provide such employees with the benefit of 'tax equalisation'. This usually means that the employer undertakes to meet, on the employee's behalf, any additional tax payable in the UK above the tax that the employee would have paid in his home country. It is well established that such payments made on behalf of employees form part of their emoluments. But there has been a difference of view between the Revenue and a number of accountancy firms about the extent to which such tax equalisation emoluments are attributable to Case II or Case III. The Inland Revenue's legal advice is that, to the extent that the tax equalisation payments are to meet UK liability arising in respect of emoluments for duties performed in the UK and which are chargeable to UK tax, they are likewise wholly assessable under Case II. The accountancy firms have argued that these payments are in respect of the employment generally and should be apportioned between Case II and Case III.

The Inland Revenue's legal advice is that, to the extent that the tax equalisation payments are to meet UK liability arising in respect of emoluments for duties performed in the UK and which are chargeable to UK tax, they are likewise wholly assessable under Case II. The accountancy firms have argued that these payments are in respect of the employment generally and should be apportioned between Case II and Case III in the same way as other emoluments.

In order to reach a settlement in a large number of cases which were open for earlier years, a compromise agreement was reached in October 1994 whereby the accountancy firms would recommend their clients to make payments of tax in respect of tax equalisation payments by reference to one half of the difference between the tax payable on the Revenue basis and on that of the accountants. This agreement was without prejudice to either the Revenue's or to the accountancy firms' positions of principle.

That compromise agreement covered 1994-95 and was subsequently extended to 1995-96 and 1996-97. It is available for these years to employees generally where tax equalisation arrangements apply.

However, the compromise agreement will not apply to years beyond 1996-97. In keeping with the legal advice we have received the position that the Inland Revenue will adopt for 1997-98 and later years of assessment will be that the tax equalisation payments made to take account of UK liability are referable to duties performed in the UK and are fully chargeable to tax under Case II.

LOCATION OF APPEAL HEARINGS

In Tax Bulletin Issue 7 (May 1993, Page 70), we published a reply from the Deputy Chairman to an enquiry from the Institute of Taxation which clarified the procedures for transferring the jurisdiction of appeals, particularly in the case of appeals against assessments under Schedule E.

The policy set out in that reply remains our view today which is that taxpayers should, wherever possible, have the opportunity to have their appeal heard at a venue convenient to him or herself. However in the light of subsequent advice one factual correction needs to be made.

We are advised that an election under Regulation 100(2) SI 1993 No. 744 (previously Regulation 48(3) SI 1973 No. 334) is irrevocable and cannot thereafter be withdrawn. However, the election can be overridden by an agreement reached under Section 44(2) Taxes Management Act 1970 as to which Division of General Commissioners is to hear the proceedings. Taxpayers or their advisors will be advised accordingly where they object to an election, for example on the grounds that it will involve them in an inconvenient journey. Normally, Schedule E appeals are heard by the Commissioners responsible for the place of employment, but any other mutually acceptable division may be agreed.

! This Article Is No Longer Current (Deleted Index 2004)

SELF ASSESSMENT :
1996-97 PAYMENTS ON ACCOUNT

THE LEGAL REQUIREMENT TO MAKE PAYMENTS ON ACCOUNT

Under Self Assessment the principle means of bringing tax into charge is not an assessment issued by the Inland Revenue, but the taxpayer's own self-assessment of the tax due (Section 9 Taxes Management Act (TMA) 1970). The charge created by the taxpayer's self-assessment for any year requires the tax for that year to be paid on 31 January following the tax year, the 'balancing payment' for that year (Section 59B TMA 1970). But it also requires tax to be paid as 'payments on account' for the FOLLOWING tax year (Section 59A TMA 1970). These payments on account are due on the 31 January and 31 July next following the tax year on which they are based. Unlike the tax charged in a 'Revenue assessment' these payments are due without demand from the Inland Revenue.

For 1996-97 the position is slightly different, in so much as the payments on account for 1996-97 are set by reference to the tax charged in REVENUE assessments for 1995-96. But otherwise the principle is the same -- where tax is brought into charge for 1995-96 the taxpayer is automatically required to make payments on account for the following year, 1996-97 (Section 59A TMA as modified by Schedule 21 Finance Act (FA) 1995).

DE MINIMIS LIMITS

Q1. Are payments on account required for 1996-97 if no tax is charged In the only relevant assessment issued for 1995-96?

A. This situation might arise where, for example, untaxed interest is assessed, but there is no tax liability because the income is covered in full by personal allowances. In such circumstances no payments on account are required, because the de minimis limit of £500 assessed income tax (and NIC) for the year is not reached.

Q2. Is this still the case if it is already known that there will be tax to pay on the same source of income for 1996-97?

A. Yes. When setting the payments on account for any year all that is relevant is that the taxpayer was charged a certain amount of income tax (and NIC) for the previous year, 1995-96. It is the amount of tax charged for the previous year which determines the 'relevant amount' used when calculating the payments on account due for 1996-97 (subject only to any subsequent revision to the 1995-96 liability, or to a claim to reduce the payments by the taxpayer).

Q3. What happens if the tax charged in an estimated assessment issued for 1995-96 is less than £500, or the non-postponed amount for 1995-96 is less than £500, but when finalised the liability for 1995-96 is £500 or higher?

A. The general principle is that whenever the tax liability for a particular year is changed, the consequential amendments to the payments on account for the following year must also be considered. If the amended liability exceeds the de minimis limits appropriate payments on account will be due.

Where the tax liability for 1995-96 was finalised in time for the correct payment to be made on 31 January 1997 then the correct amount should have been paid. This is so even if the statement of account issued in November and December 1996 was based on some previous estimate of the tax due for 1995-96 (whether the Inspector's original estimate, or the 'non-postponed amount' estimated by the taxpayer). Similarly, the correct payment should have been made, even if no statement of account was previously issued because the previous estimate of the tax due for 1995-96 was for an amount less than £500. If the correct amount was not paid interest will be charged, from the due date of 31 January until the date of payment.

It may be that 1995-96 was NOT finalised in time for the correct payment to be made on 31 January 1997. If so, the payments on account will have to be amended to the correct figures when 1995-96 is finalised and the taxpayer will be required to pay any additional tax due, together with interest. The taxpayer should pay the additional tax as quickly as possible as interest will be charged from the due date of 31 January 1997 until the date of payment.

Q4. Do the de minimis limits apply when making a claim to reduce payments on account? For example, are payments on account still required for 1996-97 if the estimated liability for 1996-97 is less than £500?

A. The de minimis limits for any year, as provided for in S59A(1) TMA 1970, apply in respect of the relevant amount of tax assessed for the previous year and are only relevant when considering whether any payments on account are due. They have no relevance when making a claim to reduce. For example, a trader, with no other income, may have been assessed to tax of £1,000 for 1995-96. If so the payments on account for 1996-97 are both set at £500 and are due on 31 January and 31 July 1997. If a claim to reduce is made on the basis that the taxpayer believes only £350 will be due for 1996-97, then the payments required are reduced to £175 each.

CLAIMS TO REDUCE

Q5. Can a claim to reduce be made simply by reference to any changes in tax rates or allowances announced in the budget?

A. When considering whether to make a claim to reduce the payments on account set for any year a taxpayer must make an estimate of the tax that he/she believes will actually be due for that year. If personal allowances have risen, or if tax rates have fallen, a taxpayer on fixed income may be able to claim a reduction on the basis that the budget changes mean that his/her overall liability for the current year will be less than that for the previous year. But a taxpayer whose income is likely to have risen from one year to the next will need to take the possible increase into account and a claim to reduce may not be appropriate.

Q6. Can a claim to reduce be signed by an agent?

A. Yes.

Q7. Can a claim to reduce be amended after it has been made?

A. Yes.

There will be circumstances in which an accurate estimate of the likely tax liability for the current year cannot be made before the first payment on account is required on 31 January. It will be up to the taxpayer to decide whether to wait until later in the year before making a more accurate claim to reduce, or to make a claim and then amend it later if necessary. A taxpayer has until 31 January 1998 to make a claim to reduce the payments on account for 1996-97. (Alternatively, early submission of the tax return for the year will crystalise any balancing repayment due.)

If the amendment reduces the payment on account to be made for the year any tax already paid can be repaid or set off against any future liability, with interest. If the amendment increases the payment on account to be made for the year interest will be due on any shortfall in the payment made on 31st January. A potential interest charge can be minimised by prompt payment of the additional payment due. (The rules determining the interest charge in such circumstances can be found in Section 86(4), (5) & (6) TMA 1970.)

In this context it should be noted that the 'belief' test in Section 59A(3) and (4) TMA 1970 applies in respect of the taxpayer's knowledge and circumstances at the time a claim to reduce is made. No taxpayer will be penalised (under Section 59(6) TMA 1970), if, in good faith, he/she makes a claim to reduce but it subsequently transpires that due to some wholly unexpected change in circumstance the liability for the year is not reduced by the amount he/she believed it would at the time the claim was made. However, interest will be due on any shortfall in the payments made.

Q8. What happens if a taxpayer could have made a claim to reduce but fails to do so before the completed return for the year is submitted?

A. When a completed tax return is processed by the Inland Revenue the payments on account for the year will be reviewed. If too little was paid on account, because a claim to reduce was excessive, interest will be charged. If too much was paid on account the tax overpaid will be repaid, or set off against a future liability with interest. So no taxpayer will be disadvantaged if he/she could have made a claim to reduce but, for whatever reason, failed to do so.

Q9. Does the higher rate tax on taxed income for 1996-97 have to be considered when making a claim to reduce?

A. Yes.

A taxpayer can ignore the higher rate tax on taxed income when setting the payments on account for 1996-97, but not when considering whether to make a claim to reduce the payments on account. This is because the process of setting the payments on account is quite separate from the process of making a claim to reduce the payments on account.

To set the payments on account for 1996-97 the taxpayer must first look back to the previous tax year, 1995-96, and identify all the income tax (and NIC) assessed for that year by the Inland Revenue. It does not matter if the taxpayer's circumstances have changed between 1995-96 and 1996-97, for example, with a change from self-employment to employment. All that is relevant, at this stage, is that the taxpayer was charged a certain amount of tax for 1995-96.

It is not enough to simply add up the total amount of tax assessed -- the sources of income assessed must also be identified. This is because

  • when calculating the total payment on account required for 1996-97 any higher rate tax assessed in a 'taxed income assessment' for 1995-96 should be ignored (S59A(1)(b) TMA as modified by para 2(3) Schedule 21 FA 95);
  • when allocating the total payment on account required for 1996-97 between 31.1.97 and 31.7.97 the amount based on rental income and untaxed investments for 1995-96 must all be allocated to the 31.1.97 payment (S59A(2) TMA as modified by para 2(5) Schedule 21 FA 95).

When considering whether to make a claim to reduce the payments on account for 1996-97 a taxpayer must make an estimate of the total income tax (and NIC) that he/she believes he/she will be due to pay for that year. This estimate should include any higher rate tax that will be dueon 'taxed income' for 1996-97. This is because all that is relevant, at this stage, is the question of whether the total net tax liability for the year (the amount due in addition to any tax deducted at source), will be less than the payments on account originally set. If so the taxpayer may make a claim to reduce the payments on account to the lower net amount that he/she believes will be due.

Q10. But doesn't the guidance in paragraph 3.118 of SAT 2 (1995) say that the higher rate tax on taxed income should be from the calculations?

A. Yes, but paragraph 3.118 -- and the example in paragraph 3.120 -- are only concerned with the rules applying to the setting of the payments on account for 1996-97.

The position regarding claims to reduce is set out in our leaflet SA351 'Your statement of account', a leaflet which was sent to taxpayers with the statements of account. The guidance in this leaflet makes it clear that a taxpayer needs to estimate the total income tax (and NIC) liability for 1996-97 when considering whether to make a claim to reduce.

EXAMPLE

A higher rate taxpayer, whose main source of income is within Schedule E, is due to pay tax on her additional income as follows:

                                1995-96      1996-97Case II, Sch D                  £10,000       £4,000
Sch A                           £20,000       £2,000
Taxed Income                    0            £14,000
Total                      £30,000      £20,000

The 1996-97 POA's must be front loaded, as follows (S59A(2) TMA as modified by para 2(5) Schedule 21 FA 95):

31.1.97
£5,000 + £20,000 =              £25,000
31.7.97
£5,000 =                         £5,000
Total                      £30,000

If a claim to reduce the POA's is made the revised payments will be as follows (S59A(4) TMA as modified by para 2(6) Schedule 21 FA 95):

31.1.97
£2,000 + £2,000 + £7,000        £11,000
31.7.97
£2,000 + £7,000                  £9,000
Total                           £20,000

Only £2,000 of the £20,000 due for 1996-97 is attributable to rental income or untaxed investment income, and therefore this is the only amount that falls to be front loaded.

LATE ISSUE OF STATEMENTS OF ACCOUNT

Q11. When are payments on account required if no statement of account has been issued for 1996-97 but it is known that there is tax in excess of £500 to pay on account for that year?

A. Statements of account are not demands to pay but non- statutory advisory notices. The statutory position is that whenever the payments on account for any year are paid late, for whatever reason, interest will be charged from the date on which the payments should have been made.

In future years taxpayers who opts to calculate their own tax bill for the year should calculate the payments on account required for the following year at the same time (for example, using the tax calculation booklet sent out with the Self Assessment Tax Return form). Similarly, taxpayers who opt to send in their tax return by 30 September, so that the Inland Revenue have to calculate the tax bill for the year on their behalf, will also be notified of the payments on account due for the following year. Where a taxpayer has opted for the Inland Revenue to calculate the tax due for the year and we fail to notify the taxpayer of the amounts due (including any payment on account) in sufficient time for payment to be made on 31 January interest will not be charged for the period of delay attributable to the late notification of the amounts due. As a matter of practice the Inland Revenue will regard any notification by the tax calculation made on or before 31 December as providing the taxpayer with sufficient time for payment to be made on 31 January.

The position for 1996-97 payments on account is slightly different. In November and December 1996, the Inland Revenue issued statements of account to those taxpayers who it believed were due to make payments on account for 1996-97. These statements were not demands, but merely non-statutory advisory notices. If the amounts shown in the statements were incorrect then the onus was on the taxpayer to pay the correct amount. (But see Tax Bulletin Issue 26 (December 1996 pages 371-372) for a concession applying where the allocation of rental income and investment income in these statements was incorrect).

Deferral of relevant date for interest purposes (Revenue failure): It may be that a statement of account was not issued in time for the correct payment to be made, not because of some failure by the taxpayer, but a failure by the Inland Revenue to make use of information supplied by the taxpayer at the proper time. (For example, a taxpayer may not have been sent a statement of account because, during the period in which the statements were issued, the taxpayer's records were being transferred from one office to another.) The late issue of a statement of account in such circumstances is broadly analogous with late notification in 'Revenue calculation' cases. Where this is the case then, providing the taxpayer has met his/her legal obligations for the year (for example, notified chargeability by 5 October 1996 and/or submitted a completed 1995-96 return by 31 October 1996) the Inland Revenue will not seek any interest on the payments on account for a period of delay caused by the late issue of a statement of account. Instead the due date for the first payment on account will be taken as 30 days after the notification of the amounts due to the taxpayer. This date, rather than the original date of 31 January, will be the relevant date for interest purposes. Providing the tax due is paid by the date notified no interest will be charged. (This practice was the subject of an Inland Revenue news release, on 27 January 1997).

Q12. When are payments on account required if a relevant assessment for 1995-96 is not issued until late in 1996 (or has not yet been issued)?

A. As statements on account are not demands to pay but non- statutory advisory notices the statutory position is the same as in the previous question -- whenever the payments on account for any year are paid late, for whatever reason, interest will be charged from the date on which the payments should have been made.

Where any relevant assessment for 1995-96 was not issued until late in 1996 (or has not yet been issued) the correct payments on account for 1996-97 may not have been established in sufficient time to trigger the issue of a statement of account in November and December 1996 (or the statement will have shown incorrect amounts). If so, the payments on account will have to be set in the correct figures when 1995-96 is finalised and the taxpayer will be required to pay any additional tax due, together with interest from the due date of 31 January 1997 until the date of payment.

Deferral of relevant date for interest purposes (1995-96 commencements): Prior to Self Assessment it was Inland Revenue practice to delay the issue of the first assessment for a newly commenced trade or profession until 13 months after the date on which the business commenced. As a result there will be some taxpayers whose first statements of account are issued late, not because of unnecessary delay but simply because the relevant amounts were not established in time. Where this is the case, the Inland Revenue will not seek any interest on the payments on account for a period of delay caused by the late issue of a statement of account. Instead the due date for the first payment on account will be taken as 30 days after the notification of the amounts due to the taxpayer. This date, rather than the original date of 31 January, will be the relevant date for interest purposes. Providing the tax due is paid by the date notified no interest will be charged. (This practice is modified where the taxpayer was late notifying chargeability. In such cases the relevant date for interest purposes will be the earlier of 30 days after the notification of the amounts due to the taxpayer or 13 months from the date of commencement, subject to an overriding condition that the relevant date cannot be earlier than 31 January 1997.

There are a variety of other circumstances in which the taxpayer may not have received a statement of account, which will not be covered by the practice described in Q11 and Q12 above. For example, it will not apply where the 1995-96 assessment was under appeal, at the time the payments on account for 1996-97 were calculated, and the amount of tax postponed was subsequently shown to be excessive. Taxpayers and agents should, therefore, seek clarification of the correct position from their tax office in any case in which they are in doubt, rather than assume that the practice will apply.

PARTICULAR CLASSES OF INCOME

Q13. Are payments on account required for 1996-97 in respect of a source of Schedule D Case I/II income assessed in a composite partnership assessment for 1995-96?

A. No.

When setting the 1996-97 payments on account for a partner who, in 1995-96, was a member of an 'old partnership', the only relevant 1995-96 assessments are those which were made on the partner alone. No account should be taken of a partners share of the tax assessed in a composite partnership assessment for 1995-96. (The same is true for a former partner who, in 1996-97, is in business on his or her own.)

The relevant assessments that may need to be considered include:

  • Case I/II income assessed for 1995-96 on the partner as a sole trader, or as a member of a 'new partnership';
  • assessments on non-Case I/II partnership income for 1995- 96, or any other non-partnership income (except taxed income assessments).;

Q14. Are payments on account required for 1996-97 in respect of Schedule D Case VI income from which tax has been deducted at source.

A. Where Schedule D Case VI income for 1995-96 has had tax deducted at source (for example under S660 Income and Corporation Taxes Act (ICTA) 1988) any higher rate tax due on that income will have been collected by means of a 'taxed income assessment' for that year. When setting the payments on account due for 1996-97 the tax assessed in any 'taxed income assessment' for 1995-96 should be excluded from the calculations. But the higher rate tax due on such sources of income for 1996-97 does need to be considered in the context of any claim to reduce the payments on account (as with other sources of taxed income).

Q15. In the past certain sources of income strictly within Cases V and VI of Schedule D were assessed, by concession, as if they were sources within Case I/II of Schedule D. If so, the tax due for each year would have been payable in two instalments rather than one. what is the position for 1996-97?

A. Leaflet SA351 made it clear that the small number of people with certain pensions and employment earnings on which tax was previously assessed, by concession, in two instalments will be asked to make two payments on account for 1996-97. In fact whenever our pre SA computer records showed tax due for 1995-96 as payable in two instalments any corresponding payments on account set up for 1996-97 will have been set up on the basis of a 50:50 split. So any similar arrangement in place for 1995-96 will have been preserved for 1996-97.

Q16. Does the same apply to furnished holiday lettings?

A. Yes. The tax on income from property was normally payable in one instalment under the pre-self assessment rules, but the tax on income from furnished holiday letting was often, by concession, payable in two instalments. Although furnished holiday lettings are now within the scope of new Schedule A the same concession will apply in 1996-97. (You will see that there is a separate note on this point in Tax Bulletin Issue 25 (October 1996 page 356).

STATEMENTS OF ACCOUNT

Q17. When will the next statements of account be issued?

A. All those taxpayers who have had a payment on account record created for 1996-97 will have received a statement in mid February 1997. This statement will show:

  • any reduction in the payments on account due following a claim from the taxpayer;
  • the amount of any tax outstanding;
  • the amount of any tax paid.
  • the amount of any interest charged (to the date shown on the statement).

There will be some cases in which payment has been made, but not in sufficient time for the payment to be processed and credited to the taxpayer's account. If so the February statement of account will show an outstanding amount due and an interest charge. The next statement of account, in March, will show the account updated to include the payment made and the revised amount of interest due, if any, from the date on which payment should have been made to the actual date of payment.

Q18. When will agents next receive updated statement of account details for their clients?

A. The next issue of statement of account details to authorised agents will not be until February 1998. But taxpayers can elect for their agents, to receive their copies of any statements of account issued. Agents, who have been authorised to receive statements, will do so from April 1997. (For more details see the Inland Revenue News release of 29th July 1996.)

(Superseded by BIM73101 onwards)

SELF ASSESSMENT:
FARMERS' AVERAGING

This article explains the new rules for making, calculating and implementing claims to farmers' averaging under Self Assessment. They were introduced by Finance Act (FA) 1994 and FA 1996.

Before Self Assessment, capital allowances were given as a deduction from Case 1 of Schedule D profits and a composite assessment made on partnership's trading profits. But under Self Assessment, capital allowances are given as an expense in computing the amount of the Case 1 profits and no composite assessment will be made on the partnership. Instead, partners will include their share of the partnership's profits in their own self assessment. These changes led to the changes in Section 96 Income and Corporation Taxes Act (ICTA)1988 (farmers' averaging) which were introduced by FA 1994.

NEW RULES FOR COMPUTING AVERAGED PROFITS

Under these new computational rules:

  • it is profits after capital allowances which are averaged;
  • averaging is claimed at partner not partnership level, (this provides an additional degree of flexibility not available under the old rules).

The new rules apply straight away to businesses which commenced for tax purposes after 5 April 1994 (new businesses). Averaging cannot be claimed for the year in which a business commences so the first pair of years for which a claim could be made by a new business is 1995-96 and 1996-97.

For businesses which commenced for tax purposes before 6 April 1994 (old businesses) 1996-97 is the year of transition. If 1996-97 is averaged with 1997-98 then the new computational rules apply. But if 1996-97 is averaged with 1995-96 then the old rules apply as follows:

  • profits before capital allowances are averaged;
  • if the farming business is carried on in partnership then averaging is dealt with at partnership level.

This is explained further in paragraphs 12.1 to 12.10 of booklet "The new current year basis of assessment" SAT1 (1995) and in the farmer's help sheet IR224 available with 1997 Tax Returns.

NEW RULES FOR IMPLEMENTING AVERAGING CLAIMS

The way in which averaging claims are put into effect has also been changed for Self Assessment. The rules were introduced by Section 128 and Schedule 17 FA 96 and are in Schedule 1B Taxes Management Act (TMA) 70. The changes were necessary because the self assessment for the first year (year 1) becomes final 12 months before the time limit for making an averaging claim with year 2.

Under the new implementation rules, averaging must be claimed in the return for year 2 or by amending that return (S42(2) TMA 70). When a claim is made, the assessment for year 1 will not be amended. Instead, an adjustment in terms of tax will be made to the tax payable for year 2. The amount of the adjustment is the amount by which the liability for year 1 would have changed if the assessment for year 1 had been amended.

This approach avoids the need to reopen earlier years. The tax due for each year can be ascertained with certainty on the basis of events of that year and is not contingent on later events.

The tax due for year 1 does not change and must be paid in full. If it is not paid at the proper time then interest will be charged.

The new rules apply first to claims to average 1996-97 with 1995-96.

1995-96 POSTPONEMENT APPLICATIONS

Assessments on old businesses for 1995-96 will not be altered on account of averaging with 1996-97. It follows that averaging with 1996-97 is not a valid reason for postponement of payment of 1995-96 tax. If an application has been made to postpone 1995-96 tax because of averaging with 1996-97, then advisers may wish to review the cases concerned to ensure clients pay the liability based on profits before averaging and thus minimise any interest charge.

HOW IS EFFECT TO BE GIVEN TO THE AVERAGING CLAIM

When averaging is claimed:

  • The assessment for year 2 should reflect the profits after taking account of the averaging claim.
  • The assessment for year 1 should not be amended. Instead, an averaging claim adjustment, in terms of tax, should be made in arriving at the amount of tax payable for year 2.

The adjustment is the difference between:

  • the amount of tax (and Class 4 NIC) charged for Year 1 based on the profits before averaging and
  • the amount of tax (and Class 4 NIC) which would be charged for Year 1 if effect was given to averaging in that year.

The averaging claim is a claim of year 2 and the operative dates for interest and repayment supplement which apply to the adjustment are set by the due dates of year 2.

If the adjustment is an increase then that amount is added to the amount of tax payable for year 2. The interest consequences of amendment of the assessment for year 1 which existed under the old rules disappear.

EXAMPLE 1

NOTE: TAX INCLUDES NIC

YEAR 1
Profit £10,000            tax:  £1,000
YEAR 2
Profit £50,000            tax: £11,000

Averaging is claimed in the year 2 return and the figures become

YEAR 1
Profit £30,000            tax:  £5,000
YEAR 2
Profit £30,000            tax:  £5,000

The adjustment is an increase of £4,000. It is added to the tax due for year 2 bringing the total payable to £9,000.

If the adjustment is a decrease then the amount is treated as an increase in the aggregate amount given by S59B(1)(b) TMA 70. The effect is that the decrease is treated as a payment on account for year 2. If the adjustment and payments on account for year 2 total more than the year 2 tax due at the time then, (unless other liabilities are outstanding or fall due within 30 days when a set-off will be made) a repayment will be made. Repayment supplement begins to run only from 31 January following year 2.

EXAMPLE 2

NOTE: TAX INCLUDES NIC

YEAR 1
Profit £50,000            tax: £11,000
YEAR 2
Profit £10,000            tax:  £1,000

Averaging is claimed in the year 2 return and the figures become

YEAR 1
Profit £30,000            tax:  £5,000
YEAR 2
Profit £30,000            tax:  £5,000

The adjustment is a decrease of £6,000. It exceeds the liability for year 2 by £1,000. The £1,000 plus any sums already paid for year 2 (and not yet repaid) will be repaid. Interest will run on the repayment from 31 January following year 2.

EFFECT ON PAYMENTS ON ACCOUNT

The liability of year 1 is unchanged by a farmers' averaging claim with year 2 so averaging is not a valid reason for claiming to reduce payments on account for year 1.

When the liability for year 2 can be accurately estimated, which may be before the return for year 2 can be submitted or even before it is issued, a claim can be made under Section 59A(3) TMA 70 to reduce the payments on account for year 2 to the amount which will be self assessed in due course (i.e. the tax due before the averaging adjustment is taken into account). So in example 2 the payments on account for year 2, based on the liability for year 1 would be £5,500 each but once the liability of year 2 was known a claim could be made to reduce them to £2,500 each.

Averaging of year 2 with year 1 will affect the payments on account for year 3, because it changes the profit for year 2 and this changes the tax self assessed for year 2 on which the year 3 payments on account are based. But the adjustment in terms of tax does not alter the tax self assessed for year 2; it is merely added to it or offset against it. So the adjustment, whether it is an increase or a decrease, has no effect of the payments on account for year 3. For example, the payments on account for year 3 in example 2 would be £2,500 each.

OLD PARTNERSHIPS 1996-97 ONLY

1996-97 is the last year for which a composite partnership assessment will be made on old partnerships. Averaged profits are computed under the old rules but the new rules for implementing claims apply. The adjustments will be made when the 1996-97 partnership assessment is finalised.

As explained in Tax Bulletin Issue 22 (April 1996 page 293) we are, exceptionally, prepared to deal with partnership accounts on which the 1996-97 partnerships assessment will be based provided that they are submitted before the 1997 partnership return is issued in April 1997. We will also consider averaging claims made when accounts are submitted prior to April even though claims should, strictly, be made in the 1997 return. Where such a claim is made, a computation of the adjustment in terms of tax should be included.

When an old partnership comes to complete its 1997 partnership return, it will need to reflect in that return any farmer's averaging claim which it has made for the pair of years 1995-96 and 1996-97. The computation of the amount of the tax adjustment which relates to 1995-96 should be entered in the "Additional Information Box" on the return.

The figure to be included at box 3.82 (box 6.82 of the draft return) -- "Tax assessed in 1996-97 partnership assessment" -- is the gross amount of tax assessed for 1996-97 before the tax adjustment (whether an increase or reduction) is made.

Similarly, each partner will need to include at box 4.74 of the partnership pages of their own return their share of the gross amount of the tax assessed on the partnership for 1996-97 before the tax adjustment is made.

INTERACTION WITH LOSS CLAIMS MADE BEFORE THE RETURN FOR YEAR 2 IS SUBMITTED

A loss claim can be made when the amount of the loss is known. It is not necessary to wait until the return is submitted. But if an averaging claim is made when the return for year 2 is submitted, then you must take care to ensure that the correct tax is paid or repaid. The rules are in paragraphs 2(5) and 3(4) Schedule 1B TMA 70.

EXAMPLE 3

NOTE: TAX INCLUDES NIC

The accounting date is early in the tax year so the results for year 2 are known before the year 2 return is issued. The figures are

YEAR 1
Profit £50,000              tax: £11,000
YEAR 2
Loss (£10,000)              tax: nil

The loss of £10,000 is claimed against the year 1 profit before the year 2 return is submitted but after the final payment for year 1 has been made. £4,000 is repaid.

In anticipation of an averaging claim, a claim is made to reduce the payments on account for year 2 to £2,500 each.

The return for year 2 is submitted after the second payment on account for year 2 has been made. Averaging is claimed in the return and the figures become (ignoring the loss claim)

YEAR 1
Profit £25,000              tax:  £5,000
YEAR 2
Profit £25,000              tax:  £5,000

The loss claim may be revised (S96(9)(b) ICTA 88) but it is not so including the loss relief gives

YEAR 1
Profit       £25,000
=loss        £10,000
£15,000         tax:  £2,500

The overall reduction in the year 1 tax is £11,000 - £2,500 = £8,500. £4,000 has already been repaid so the adjustment on account of averaging is £4,500 not £6,000. The year 2 liability of £5,000 has been paid on account so the £4,500 will be repaid. There will be no repayment supplement unless the repayment is made after 31 January following year 2.

SELF ASSESSMENT:
THE TAX OBLIGATIONS OF TRUSTEES AND
BENEFICIARIES OF BARE TRUSTS.

The beneficiaries of certain types of bare trusts must ensure that if they are within Self Assessment, all trust income and gains are included in their personal tax returns and any income tax or capital gains tax due, accounted for.

A "bare trust", also known as a "simple trust", exists where the beneficial owner of the property is fully entitled to both the capital and income from that property. The property will be held in the name of the trustee, but the trustee will have no discretion over what income to pay the beneficiary. The trustee is in effect a nominee in whose name the property is held. The beneficial owner is the person who benefits from, and is entitled to, the property and any income it produces.

Prior to 6 April 1996, trustees of some bare trusts did in certain situations, deduct and account for tax on trust income received gross. These amounts then became taxed income in the hands of the beneficiaries, and further liability only arose if they were higher rate taxpayers. If however they had no personal liability a repayment would be due.

Under Self Assessment, the Inland Revenue will no longer expect trustees to account for tax in such circumstances, because there is no entitlement in law for trustees to deduct tax from income arising to bare trusts. Any income which is received gross by the trustees must be paid gross to the beneficiaries. The only exception to this rule is that UK resident trustees may be required under the Non Resident Landlords Scheme to deduct and account for tax on the rental income of beneficiaries whose usual place of abode is outside the UK.

Trustees of bare trusts will not be required to complete Self Assessment tax returns, or to make payments on account. Beneficiaries will still be required to give details of all their income and gains from bare trusts in their own tax returns and in addition, will be required to account to the Inland Revenue for the full amount of any tax due.

Although the Inland Revenue are endeavouring to identify those bare trusts where trustees have previously made annual returns and accounted for tax, in order to notify them of this change, there will be some cases which will not be recognised in time to prevent the 1996-97 payment on account notices and Self Assessment tax returns from being issued to the trustees.

Any trustees receiving a payment on account notice should return it to the issuing Trust Office with a brief explanation so that the records can be amended. Any trustees receiving a Self Assessment tax return after 6 April 1997 should complete the final three questions on the return form in accordance with the notes given in Step 1 on the form.

There are a number of collective investment schemes which are constituted as bare trusts, but only two kinds of them are treated as such for tax purposes. These are Enterprise Zone Property Unit Trusts (EZPUTs), and Pension Fund Pooling Vehicles (PFPVs). The trustees of such schemes will not receive Self Assessment tax returns. That is because the income and gains which arise under EZPUTs and PFPVs belong to the unit holders of the schemes and if any expenditure is incurred by the trustees which gives rise to capital allowances, those allowances are made to the unit holders and not the trustees.

The trustees of EZPUTs and PFPVs will, however, remain responsible for agreeing the amounts of the schemes' income, profits, gains, capital expenditure, capital allowances, and balancing adjustments with their own tax Inspectors in accordance with the rules laid down in the relevant Income Tax Regulations and for providing the unit holders of the schemes with certificates giving details of the parts of those amounts that are, in each case, attributable to them.

(No longer relevant)
SELF ASSESSMENT:
CARRY BACK OF PENSION CONTRIBUTIONS

The article on pension carry back in Tax Bulletin Issue 26 (December 1996 page 361) explained the new rules under Self Assessment where a claim is made to carry back pension contributions. The new rules came into effect from 6 April 1996 but a Press Release issued on 21 March 1996 stated that the new rules would not apply to claims to relief for carry back from 1996-97 to 1995-96. This ensures that where a pension contribution made in 1996-97 is carried back to 1995-96 there will be a consequential reduction in the payments on account for 1996-97. Claims to relief for carry back from 1996-97 to 1994-95 have no such consequential effect and are not covered by the terms of the Press Release. In these cases, relief will be given under the new rules. 1994-95 assessments will, therefore, not be amended to give effect to the relief.

FARMING:
BSE COMPENSATION

In mid-February 1997 MAFF issued a guidance note on Bovine Spongiform Encephalopathy (BSE) compensation to beef and dairy farmers. It was written jointly by the Ministry of Agriculture Fisheries and Food and the Inland Revenue, and the Country Landowners' Association and the National Farmers' Union (England and Wales) were consulted while it was being prepared. It gives a simple review of how compensation payments under the four main BSE schemes are taxed. It does not go into detail: instead it suggests that farmers who want detailed information consult their professional adviser or Tax Office. A copy of the note may be obtained by ringing the MAFF Helpline on 020 8330 8840.

This article covers the points where experience so far has shown that queries may be raised. The statutory rules are in Schedule 5 Income and Corporation Taxes Act (ICTA) 1988 (the herd basis). References to the Inspectors' Manual (IM) are included as they may be of assistance both to Inspectors and to the increasing number of professional advisers who have access to this manual.

HERD BASIS -- REPLACEMENTS

Some farmers are unnecessarily concerned that they may face unusually high tax bills where they dispose of production animals on the herd basis just before their year end and are unable to replace them until the following year of account. Their worry is that the compensation proceeds will be taxed in the first year but the replacement cost will not be allowed until the next year.

Where an animal is sold and replaced in the same accounting period, there is no difficulty. Unless the replacement is of better quality, the difference between the compensation and the cost of replacement will be taken into account. An exception which arises only on compulsory slaughter is considered in the final section of this article.

Furthermore, in practice, we accept as replacements animals acquired within 12 months of the disposal even where the acquisition took place in the accounting period following that in which the disposal took place (see Tax Bulletin 13 October 1994 page 161). There are two methods of dealing with the computational consequences of this and both are acceptable. The most common, particularly if it is known when the first accounts are prepared that the animals which left the herd have been or will be replaced, is to leave the profit or loss arising in the first period "in suspense" until the second accounting period when the replacement cost is known and the difference between sale proceeds and replacement cost can be calculated (IM2305). The effect is that the net cost of replacement is allowed in the second year. Alternatively the profit or loss can be brought into account in the first accounting period and any necessary adjustment made in the second accounting period so that, overall, the difference between the sale proceeds and replacement cost is brought to account.

COMPULSORY SLAUGHTER

In some circumstances, the tax treatment of BSE compensation depends on whether it is paid for the compulsory slaughter of the animal(s) concerned. Compensation payments under the following schemes are NOT in respect of compulsory slaughter and they are treated for tax purposes as if the compensation payment was the amount received from the ordinary commercial sale of the animal concerned: --

  • the Calf Processing Scheme
  • the Over Thirty Month Scheme
  • the BSE Selective Cull where the animal slaughtered was born before 15 October 1990.

Compensation paid under the following schemes is for compulsory slaughter:

  • the BSE Suspects Scheme
  • the BSE Selective Cull where the animal slaughtered was born on or after 15 October 1990.

COMPULSORY SLAUGHTER: FRESH RIGHT OF HERD BASIS ELECTION

Most production herds are on the herd basis. But where a herd is not on the herd basis (whether by choice or oversight) and a substantial part (which we interpret as 20% or more) is compulsorily slaughtered there is a fresh right of election under paragraph 6 (IM2316c). The time limit for election is the finality date for the return for the year for which farming profits are computed by reference to the year of account in which the compensation became due.

If an election is made it covers mature production animals. They are treated as transferred to the herd at the start of the accounting year or, if later, when they became mature. The cost of these animals should be credited as a trading receipt.

COMPULSORY SLAUGHTER: EXTRA STATUTORY CONCESSION B11

If production animals not on the herd basis are compulsorily slaughtered and the number slaughtered is not enough to trigger the special right to make a herd basis election, then ESC B11 "Compensation for compulsory slaughter of farm animals" may be of benefit (IM2268a).

Under the concession the profit on disposal of the animals compulsorily slaughtered is excluded from the profits for the year in which the compensation became due and spread evenly over the following three years.

COMPULSORY SLAUGHTER: REPLACEMENTS OF LOWER QUALITY

Where an animal on the herd basis is compulsorily slaughtered and replaced but the replacement is of lower quality, part of the compensation may be tax free. The amount included as a trading receipt is limited to the cost of the replacement and the excess is not liable to tax (IM2305).

Under the BSE Selective Cull, 'top-up' payments may be made depending on what proportion of the herd is slaughtered. We have been asked whether these payments count as sale proceeds of the animals concerned like the basic compensation. We can confirm that that they do. Where valuable animals are involved the 'top-up' is subject to an over-riding limit and if animals are slaughtered in batches it may be paid in stages. Practitioners should therefore take care to ensure that the 'top-up' is correctly apportioned between the animals concerned.

If the lower quality replacements are, in due course, replaced by better quality animals, then the full cost of the second replacement is not allowable and an appropriate restriction on account of the increased quality must be made.

interpretations

CAPITAL GAINS TAX:
MEANING OF 'SMALL' IN SECTIONS 23, 116,
122, 133, AND 243 TAXATION OF
CHARGEABLE GAINS ACT (TCGA) 1992

The above sections all contain provisions which apply where certain receipts are 'small' as compared to some other specified amount. Our long standing approach has been that 'small' means 5% or less. This view has been published in the Capital Gains manual and (in relation to Section 122 TCGA 1992) in Tax Bulletin Issue 5 (November 1992 page 46).

We have reconsidered our approach in these cases. The judgements in the case of O'Rourke v Binks, 65 TC 165, indicate that what is 'small' is a question of fact and degree and has to be considered in the light of the circumstances in any particular case. The purpose of the legislation is to avoid the delay and expense of a full computation where this would be disproportionate, and to avoid the need for assessments in trivial cases.

The "5% test" continues to offer practical advantages and we will continue to accept that any case which meets that test can be regarded as small. To further reduce the likelihood of assessments in trivial cases, we will also now accept that these provisions can apply wherever the amount or value of the receipt is £3,000 or less whether or not this would fall within the 5% test. This revised approach may be applied to existing cases where the point remains open at the date of publication of this article -- 24 February 1997 and to all future cases.

Exceptionally, taxpayers may wish to suggest that receipts above these limits should nevertheless be regarded as small, in the context of their particular circumstances; or, conversely, that receipts below these limits should not be so regarded. Any such cases will remain to be resolved on their merits, having regard to the dicta in O'Rourke v. Binks.

CAPITAL GAINS TAX: RETIREMENT RELIEF --
EXTENDING THE QUALIFYING PERIOD

We have received numerous enquiries about when paragraph 14 of Schedule 6 Taxation of Chargeable Gains Act (TCGA) 1992 can apply to extend an individual's qualifying period for retirement relief purposes. A simple example illustrates the query.

EXAMPLE

Mrs Black worked for seven years as a full time employee of a large trading company. She held no shares in the company, so it was not her "personal company". (The definition of "personal company" is in paragraph 1(2) of Schedule 6 TCGA 1992.) She then resigned from the company and immediately started her own consultancy business. Two years later she sold that business.

Assuming that the sale of the consultancy meets all the retirement relief conditions, her qualifying period is the two years she owned the business.

The question we are asked is whether the previous period of employment can be counted as an "earlier business period" under paragraph 14 of Schedule 6 TCGA 1992, so that it can be added on to the later business period to make an extended nine year qualifying period.

It has been suggested that extension is possible because Mrs Black was ". . . .concerned in the carrying on of a business. . . .as a full time working officer or employee. . . ." (paragraph 14(3)). The period of employment therefore qualifies as an "earlier business period".

We take the view that paragraph 14 does not allow extension of the qualifying period in Mrs Black's circumstances.

Paragraph 14(1) and (2) require the length of the qualifying period to be redetermined on certain assumptions. In particular, it must be assumed that the two businesses are the same business. All the qualifying conditions in Section 163 TCGA 1992 have to be met throughout the extended qualifying period which is redetermined by reference to that assumed "same business".

If the relevant business is owned for some period by a company which is not the individual's personal company, the qualifying conditions will not all be met and the qualifying period cannot be extended.

[Para 14 Schedule 6 TCGA 1992]

INHERITANCE TAX (IHT):
EXCLUDED PROPERTY SETTLEMENTS
BY PEOPLE DOMICILED OVERSEAS

We have been asked how the IHT provisions on excluded property apply to the assets of a settlement made by a person domiciled overseas where:

  • all, or only some, of the settled assets are situated outside the UK when a chargeable event occurs; or
  • a person domiciled in the UK has also provided property or funds for the purposes of that settlement.

References in this article are to Sections of the Inheritance Tax Act 1984.

EXCLUDED PROPERTY

For persons domiciled abroad, IHT generally applies only to their UK assets; it treats their overseas assets as excluded property, that is: not within the charge to IHT-S 6(1)). For assets owned outright, it is the owner's domicile at the time of a tax charge that is relevant in deciding whether or not the assets are excluded property.

Slightly different rules apply to property held in a settlement. An asset is excluded property if it is situated abroad when a chargeable event occurs and if the settlor (defined in s 44) was domiciled outside the UK at the time the settlement was made -- S48(3).

However, an "excluded" asset is not always completely irrelevant for the purposes of IHT. So:

  • an "excluded" asset in a person's estate may still affect the valuation of another asset in the estate, for example, an "excluded" holding of shares in an unquoted company may affect the value of a similar holding in the estate which is not "excluded";
  • the value of an "excluded" asset at the time the asset becomes comprised in a settlement may be relevant in determining the rate of any tax charge arising in respect of the settlement under the IHT rules concerning trusts without interests in possession -- Sections 68(5), 66(4) and 69(3).

Domicile is a concept of general law but, in certain circumstances (S267), a person with a general law domicile abroad can be treated as having a UK domicile for IHT purposes.

SETTLOR ADDS ASSETS TO HIS/HER EXISTING SETTLEMENT

In the light of the definitions of "settlement" and "settled property" in S43, our view is that a settlement in relation to any particular asset is made at the time when that asset is transferred to the settlement trustees to hold on the declared trusts. Thus, assets added to a settlor's own settlement made at an earlier time when the settlor was domiciled abroad will not be "excluded", wherever they may be situated, if the settlor has a UK domicile at the time of making the addition.

In determining the tax treatment of particular assets held in the same settlement it may, therefore, be necessary to consider the settlor's domicile at times other than when the settlement was first made. And if assets added at different times have become mixed, any dealings with the settled fund after the addition(s) may also need to be considered.

SEVERAL PERSONS CONTRIBUTE TO A SINGLE SETTLEMENT

There are rules (S44(2)) which provide that assets contributed to a 'single' settlement by more than one settlor are to be treated as comprised in separate settlements for IHT purposes if "the circumstances so require". There is no definition of 'required circumstances' or statutory guidance on how the assets in the single, actual settlement are to be attributed to the deemed separate settlements.

However, the provision is similar in terms to paragraph 1(8) of Schedule 5 Finance Act 1975, which was considered by Chadwick J. in Hatton v. IRC [1992] STC 140. In the light of the decision in that case we take the view

  • that the determination of the extent to which overseas assets in a settlement are excluded property by reason of the settlor's domicile is a relevant 'required circumstance'; and
  • that
    • where a clear, or reasonably sensible, attribution of settled property between the contributions made by several settlors is possible, there will be a separate settlement, with its own attributed assets, for each contributor for IHT purposes;
    • if such an attribution is not feasible, each separate settlement will comprise all the assets of the single, actual settlement.

TRUST RECORDS

It follows from the comments above that the trustees of a settlement should keep adequate records to enable any necessary attribution of the settled property to be made if either

  • the settlor has added further assets to the settlement after it was made; or
  • two or more persons have contributed funds for the purposes of the settlement.

[Sections 43,44 and 48 IHTA 1984 Hatton v. IRC [1992] STC 140]

(Superceded by BIM 44000 onwards)
SCHEDULE D CASES I & II:
EMPLOYEE SHARE OWNERSHIP TRUSTS

This article considers the treatment of an employer's contributions to an Employee Share Ownership Trust (ESOT). It is concerned with situations where:

  • the trust is not a statutory ESOT, that is it is not one set up in terms of Sections 67 to 74 and Schedule 5 of the Finance Act (FA) 1989;
  • applying ordinary Schedule D Case I/II principles, contributions are revenue in character (not capital);
  • normal accounting practice requires Urgent Issues Task Force abstract No.13 (UITF 13) to be applied to treat the making of the contributions as giving rise to an asset in the employer's accounts.

We have been asked to say how contributions made by an employer in these circumstances should be dealt with for tax purposes.

BACKGROUND

An ESOT is part of the mechanism to give effect to an Employee Share Ownership Plan (ESOP), which has been defined -- loosely -- as an arrangement whereby an employee benefit trust (the ESOT) acquires a substantial quantity of employer shares or securities for subsequent distribution to some or all employees, with financial assistance provided directly or indirectly by the employer.

Urgent Issues Task Force abstract No.13 (UITF13 -- Accounting for ESOP Trusts) explains how Financial Reporting Standard No.5 (FRS 5: Reporting the Substance of Transactions) applies to ESOTs. It is beyond the scope of this article to set out in detail the guidance in the UITF. But very briefly, under it, cash held and shares purchased by the trustees will normally remain assets of the employer for accounting purposes (in accordance with the definition of an asset in FRS 5) until the rights in the shares are transferred to employees. Consequently contributions to the trust by the employer will not necessarily be charged against profits as they fall due but in an earlier or later period.

OUR VIEW

As a matter of general Case I computational principle it is well established that:

  • the starting point for the computation of taxable profits is the accounts of a trader drawn up in accordance with normal accounting practice;
  • the profits shown by those accounts are then adjusted to give effect to specific statutory rules or to more general principles, derived by the courts from the need to compute 'the full amount of the profits or gains' (Sections 60 and 70 Income and Corporation Taxes Act 1988).

Unlike statutory ESOTs -- for which Section 67 FA 1989 guarantees a Schedule D Case 1 deduction at the time of the company's contribution to the trustees, no specific statutory rules apply to contributions to non-statutory ESOTs.

Unless therefore, the treatment in the accounts is over-ridden by such a tax rule, it is followed in computing taxable profit. The point at issue here is whether the time at which contributions to 'non-statutory' ESOTs are charged against profits under UITF 13 is overridden by some general tax principle.

Recent cases show that the courts are nowadays reluctant to discern general tax principles which override the time when income and expenses are recognised in accounts drawn up in accordance with normal commercial practice. See Threlfall v. Jones (66TC77) and Johnston v. Britannia Airways Ltd (67TC99).

We consider that no such principle overrides the accounting treatment required by UITF 13. In particular, the Court of Appeal judgements in Threlfall make it clear that there is no general tax principle that an expense should necessarily be deducted for tax when it is incurred or paid. Nor, in our view, should UITF 13 be over- ridden for timing purposes on the grounds that it strays too far from the legal form of the transactions. A similar contention, that Statement of Standard Accounting Practice 21 (Accounting for leases and hire purchase contracts) should not be followed because it treated the hiring of an asset as a loan, failed in Threlfall (66TC at 126I-127F).

By the same token, no general tax principle derived from case-law would, in our view, prevent a deduction for a properly calculated provision included in an employer's trading accounts for a period in respect of future contributions to an ESOT to reflect employees' accruing entitlement to benefits in that period.

[Threlfall v. Jones (66TC77) and Johnston v. Britannia Airways Ltd (67TC99)]

(Superseded by BIM35660)

SCHEDULE D CASES I & II:
EXPENDITURE ON STAFF TRAINING
AND DEVELOPMENT

Sometimes, the Government gets suggestions that employers should be given tax relief for the costs of training their employees. That surprises us, since except in cases where the employee has some link with the employer outside the employment itself, the disallowance of expenditure by an employer on staff training and development will be extremely unusual indeed.

We are concerned here with the treatment of expenditure by an employer on the training and development of employees in computing the employer's profits under Case I or II of Schedule D where that expenditure is properly charged against profits in the employer's accounts drawn up in accordance with normal accounting practice. This article considers in what circumstances such expenditure may be disallowed either under Section 74(1)(a) ICTA 1988 or because for tax purposes it counts as capital. Both issues ultimately depend of course on particular facts and circumstances but some general observations may nevertheless be helpful.

By way of preliminary, it should be noted that expenditure disallowable under the general rules mentioned above may nevertheless qualify for relief under other provisions. For example certain employee training costs qualify for a deduction under Section 588(3) ICTA 1988 and capital expenditure on, say, permanent training facilities or equipment for the purposes of the business may qualify for capital allowances.

BUSINESS PURPOSES

Under Section 74(1)(a) expenditure is disallowed if it is not incurred wholly and exclusively for the purposes of the business in question. It is important to realise that the test is framed in terms of the purpose of expenditure rather than its result. It does not enable the Inspector to second guess the wisdom of decisions taken for purely business purposes by reference to the amount of business benefit ultimately obtained from the expenditure. For the same reason, the existence of some non-business benefit arising out of expenditure does not cause it to be disallowed if in fact the expenditure is incurred exclusively for business purposes.

Against this background it is not easy to see how Section 74(1)(a) would lead to the disallowance of expenditure on the training and development of staff whose relationship with their employer is limited to the employment itself. This remains the case where the expenditure is on the development of an employee's skills and attributes which may not be directly related to his or her current job with the employer, for example training that would only become relevant if the trainee is successful in winning promotion. Nor would expenditure cease to satisfy the statutory test just because the employee may derive considerable personal enjoyment or satisfaction from the training or development in question.

Where on the other hand an employee or director of a company, on whom the expenditure is incurred, has a significant proprietary stake in the business or is a relative of those who do, there is obviously a much greater chance that expenditure may have been incurred not, or not wholly, for business purposes but to provide the employee with some personal benefit. If that is the case then the expenditure is not deductible -- the business purpose has to be the exclusive purpose. To take an extreme example, there could be no allowance for the educational costs of the business proprietor's son who is employed in the business during university holidays. In such cases it is often helpful to ask whether the expenditure would have been incurred on an otherwise unconnected employee doing the same job.

Finally a caveat on the purpose of expenditure: where an employer carries on more than one trade or profession, either at the same time or consecutively, expenditure on training, like other expenditure, for the purpose of one such business (or partly for its purpose) cannot be deducted in computing the profits of the other.

CAPITAL

Some employers may also be concerned that expenditure, though incurred exclusively for business purposes, may be disallowed for tax purposes on the grounds that it is of a capital rather than revenue nature even though it has been charged as incurred against profits in the employer's commercial accounts. This would be on the basis that the benefit the employer obtains from the expenditure by way of better trained staff is of such a substantial and enduring nature that the expenditure can be viewed as incurred on an identifiable capital asset.

In principle this may be a possibility but we find it difficult to imagine circumstances likely to occur in practice where the benefit which the employer obtains can be viewed as such an identifiable capital asset. Such factors as the pace of technological and commercial change and an employee's right to resign and seek work elsewhere militate against such a view.

On a particular point, we would not regard the cost of training staff to use new equipment or systems of a capital nature as itself capital.

OTHER ISSUES

In this article we have not sought to address the tax treatment of the costs incurred by a self-employed person on his or her own training and development. There was an article on this in Tax Bulletin Issue 1 (November 1991 page 4). Nor is this article concerned with the treatment under Schedule E of employees who benefit from training and development expenditure. Clause 64 of the current Finance Bill confirms the current practice of exempting the benefit-in-kind of genuine work-related training, while taxing employees on holidays and other rewards dressed up as 'training'. Budget Day Press Release REV 29 gave fuller details.

[Section 74 ICTA 1988]

miscellaneous

CAPITAL GAINS TAX:
POST TRANSACTION VALUATION CHECKS

With effect from 1 April 1997, we intend to introduce a new service that will provide individuals or trustees with the opportunity to submit capital gains tax valuations to their tax office for agreement before the filing date for making their return. The aim of the new service is to help with the preparation of the Self Assessment return. So the new service will not initially be available for valuations needed for the computation of liability to corporation tax on chargeable gains. We will consider valuations only after the relevant transaction has taken place.

If we cannot agree the proposed valuations we will put forward an alternative figure that we would accept. If this is not agreed we will be happy to try to negotiate an acceptable valuation. We will try to put forward an alternative and, if time allows, enter into negotiations before the deadline for filing returns. In some cases this may not be possible, either because of the complexity of the valuation or if the application to use the service is made late. The return must still be filed within the time allowed.

No charge will be made for this service. The news release dated 4 February 1997 gives more details. A leaflet CGT. 14 entitled "Capital Gains Tax -- An Introduction" contains full information about the service and will be available from April 1997. Applications to use the service must be made on form CG34 which will be available from 10 March 1997. The leaflet and the form will be available from your tax office or Tax Enquiry Centre.

The existing arrangements set out in the Press Release dated 18 November 1991, where valuations of shares at 31 March 1982 are required for a number of shareholders, continue. Telephone enquiries about this existing service can be made to Shares Valuation Division on 0115 974 2211.

! This Article Is No Longer Current (Deleted Index 2004)

TAX TREATY UPDATE

Double Taxation agreements (DTAs) are important for the UK business community. They are part of the international framework for removing tax impediments to free and open trade and investment in the global economy. More directly, DTAs assist UK companies' overseas activity by removing double taxation and by reducing compliance burdens for UK companies in dealing with overseas tax administrations. The UK now has DTAs with 101 countries.

UK'S CENTURY

The entry into force of recent treaties with Latvia and Venezuela means that the UK is the first country to secure comprehensive tax treaties with 100 countries, consolidating its position as having the largest network of tax treating in the world.

Commenting on this achievement, Michael Jack, Financial Secretary to the Treasury, said: "I am delighted that a flurry of tax treaties approved in December last year has brought up a very important century partnership. A partnership of good international relations and sound tax negotiating which is to the benefit of British business. Our extensive treaty network plays a vital part in opening markets for international trade and investment. These treaties are welcomed by business as a means of reducing tax-related barriers and providing certainty of treatment. The UK has every right to be proud of its position as world-leader in the field of tax treaties. Being first to reach the landmark of treaties with 100 countries is a notable achievement."

UK/REPUBLIC OF KOREA DTA

Korea now has the eleventh largest economy in the world and has recently become a member of OECD. A new treaty between Korea and the UK has now entered into force. There are a number of important changes from the old treaty (1977), including the rates of withholding tax on dividends, interest and royalties. It also makes important changes to the tax sparing provisions. In commending the treaty to Parliament, the Financial Secretary said that he was confident that the new treaty would promote greater trade and investment between the two countries.

UK/LATVIA AND UK/VENEZUELA DTAS

The new treaties with Latvia and Venezuela entered into force on 30 December 1996 and 31 December 1996 respectively, and were approved by the House of Commons in November along with new Protocols to the treaties with China, Denmark and Finland.

1997-98 TREATY PROGRAMME

The Inland Revenue devotes significant resources to the treaty negotiation process and to setting the priorities each year. We have recently consulted UK business and representative bodies about priorities for next year. We are grateful for all the responses received and have taken them into account in our priorities, to be published in April, when approved by Ministers.

We propose to issue news about treaty developments on a more regular basis in future editions of Tax Bulletin.

Representations about new DTAs or suggestions about desirable changes to existing DTAs are always welcome and should be addressed to:

Joanne Newton
Inland Revenue
International Division
Room 314
Strand Bridge House
138-142 The Strand
London
WC2R 1HH

Telephone: 020 7438 6333.

! This Article Is No Longer Current (Deleted Index 1999)

INFORMATION AVAILABLE ON
THE INTERNET

Readers may care to note that the following information is available on the Internet.

CHANGE OF TITLE AND ADDRESS:
PUBLIC ENQUIRY ROOM

With effect from 7 February 1997 the Public Enquiry Room is known as the Inland Revenue Information Centre and has moved to:

Ground Floor
South West Wing
Bush House
Strand
London
WC2B 4RD

The telephone number is unchanged: 020-7438-7772.

INLAND REVENUE STATEMENTS OF PRACTICE
AND EXTRA-STATUTORY CONCESSIONS ISSUED BETWEEN
1 DECEMBER 1996 AND 31 JANUARY 1997

EXTRA STATUTORY CONCESSIONS

Number        Title                               Date of Issue

There have been no Extra-Statutory Concessions issued in this period.

STATEMENT OF PRACTICE

01/97         The Electronic Lodgement Service    			16/01/97

You can get copies of SPs and ESCs from Christine Jordan at the Inland Revenue Information Centre, Ground Floor, South West Wing, Bush House, Strand, London WC2B 4RD. Telephone 071-438 7772

CONTENT

The content of Tax Bulletin gives the views of our technical specialists on particular issues. The information published is reported because it may be of interest to tax practitioners. Publication will be six times a year, and include a cumulative index on an annual basis.

  • You can expect that interpretations of the law contained in the Bulletin will normally be applied in relevant cases, but this is subject to a number of qualifications.
  • Particular cases may turn on their own facts, or context, and because every possible situation cannot be covered there may be circumstances in which the interpretation given here will not apply.
  • There may also be circumstances in which the Board would find it necessary to argue for a different interpretation in appeal proceedings.
  • "Revenue decisions" report conclusions that were reached on the facts of individual cases, but do not necessarily include all the detailed facts which may have been relevant to the decision. They provide an indication of the approach the Revenue has adopted in the past, but have not been drafted as generally applicable statements of the Revenue's position. It cannot be assumed therefore, that interpretations of the law contained or implicit in these decisions will necessarily be applied in other cases.
  • The Bulletin does not replace formal Statements of Practice.
  • The Board's view of the law may change in the future. Readers will be notified of any changes in future editions.

Nothing in this Bulletin affects a taxpayer's right of appeal on any point.

Letters on any article appearing in Tax Bulletin should be sent to the Editor, David Richardson, Room 402, 22 Kingsway, London WC2B 6NR. We are sorry though that neither he nor our contributors will normally be able to enter into correspondence about Tax Bulletin or its contents.

SUBSCRIPTION

The subscription for 1997 is £20 (1996 £20). If you would like to subscribe to Tax Bulletin please send your name and address together with your cheque to Inland Revenue, Finance Division, Barrington Road, Worthing, West Sussex BN12 4XH. Cheques should be crossed and made payable to "Inland Revenue".

If you would like further information regarding Tax Bulletin please contact Ms Nahid Shariff, Room 435, 22 Kingsway, London WC2B 6NR. Telephone: 020-7438-7842.

COPYRIGHT

Tax Bulletin is covered by Crown Copyright. There is no objection to firms copying the Bulletin for their own use. Anyone wishing to republish Tax Bulletin or extracts more widely should write for permission to Ms Nahid Shariff, Room 435, 22 Kingsway, London WC2B 6NR.

TAX BULLETIN PROVIDED IN WEB READY FORMAT COURTESY OF TAX ANALYSTS AND TAXBASE

Image: Tax Analysts logo [4k]