Employment Termination Settlements (Article deleted since index 2004)
Stamp Duty Reserve Tax:S703 ICTA 1988 And Share Buy Backs (No longer relevant)
Deeds of Covenant (Article no longer current)
Flat Management Companies (Superseded by PIM1070)
Lloyd's Underwriters (Article no longer current)
Pension Schemes OfficeStatements of Practice and Extra-Statutory Concessions
The new legislation was the subject of extensive consultation with taxpayers, tax advisers, and representative bodies. During the consultations, requests were made for guidance on certain issues following the integration of transfer pricing into the CTSA system. Foremost among these issues were record keeping, financial transactions and arrangements ('funding'), and penalties.
Reproduced below is the text of guidance notes on record keeping and funding. The guidance on penalties will be published shortly. These notes will be incorporated into Departmental guidance manuals in due course.
The notes refer to 'the OECD Guidelines'. These are the 1995 Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, available from HMSO in the UK or the OECD at 2 rue André-Pascal, 75775 Paris Cedex, France.
Section 12B Taxes Management Act 1970 and paragraph 21, Schedule 18 FA 1998 require taxpayers to keep and preserve the records needed to make and deliver a correct and complete Return for any chargeable period.
In interpreting those rules for transfer pricing purposes, the Inland Revenue will be guided by Chapter V of the OECD Guidelines. This is designed to assist tax administrations in developing their approaches to documentation rules, and taxpayers in identifying the records that would be helpful in demonstrating how their methodologies satisfy the arm's length principle.
The Inland Revenue does not want taxpayers to suffer disproportionate compliance costs, nor to be required to prepare and retain documentation which is out of keeping with the nature, size, and complexity of their business, or with the transaction (or series of transactions) in question.
At the same time, taxpayers will be required to self assess accurately, and may be called on by the Inland Revenue to justify their transfer prices and the quantum of income, profits or losses returned for tax purposes.
Taxpayers should therefore prepare and retain such documentation as is reasonable given the complexity or otherwise of the relevant transaction (or series of transactions), and which identifies:
Where arrangements continue in force for more than one return period (e.g. a distribution agreement lasting several years), there is no need to prepare fresh documentation for each return period, provided the original documentation is sufficient to demonstrate that the taxpayer has made a complete and correct return for that later period. Any significant changes in the nature or terms of the transaction or transactions in question should be recorded.
The documentation should exist at the latest by the time the Return is made.
The rules governing the period for which records generally must be preserved are described on page 587 of this issue and apply as much to transfer pricing documents as to other records. In summary, this means that transfer pricing documents should be preserved until the later of:
Interest or discounts payable on funds obtained from connected persons may be excessive for reasons other than the existence of an excessive rate. The amount of the loan or terms other than the rate may not reflect what would have been agreed if the parties had been unconnected and acting entirely at arm's length, or the transaction might not have taken place at all.
In this context the guidance on when transactions should be disregarded at 1.37 of the OECD Guidelines is particularly relevant. One example quoted is that of an investment in an associated enterprise in the form of interest-bearing debt when, at arm's length, and having regard to the economic circumstances of the borrowing company, the investment would not have been expected to be structured in that way. In such circumstances it is recognised that it might be appropriate to treat the loan as a subscription of capital.
Interest, discounts, etc. which are excessive for reasons other than the rate being excessive will continue to be reclassified as distributions under Section 209(2)(da) ICTA 1988 where the borrower is a 75% subsidiary of the lender or both are 75% subsidiaries of another company. Such excessive interest is not allowed as a deduction in the corporation tax liability of the paying company and, until its abolition, ACT will be payable at the time the payment is made.
The factors which we take into account to determine whether interest is excessive for any reason for the purposes of Section 209(2)(da) ICTA 1988 are discussed in Tax Bulletin Issues 17 and 35 (June 95 and June 98). The approach outlined in these articles will also apply for the purposes of Schedule 28AA - see below - including the normal focus on the UK grouping in determining borrowing capacity.
As provision may be made by means of a series of transactions, the situation where a related party provides a guarantee to a bank which then, on the strength of this, makes a loan, or an additional part of a loan, available to a UK borrower will be within the scope of the legislation. If, however, the effect of the guarantee is solely to reduce the rate of interest being charged and the UK borrower is not thinly capitalised the legislation will not apply, since no tax advantage is being conferred.
Where there is a special relationship between the borrower and lender or between them and another person, in addition to the tax treatment of the interest expense incurred by the borrower, it is necessary to consider the liability of the non-resident lender in respect of UK source interest income. In these circumstances the terms of a particular double taxation treaty may not allow excessive interest to be paid without deduction of income tax at the UK domestic rate. Consequently, in such situations interest will both be disallowable in the borrower's tax computation and also suffer deduction of income tax at source without the benefit of any reduced rate which might otherwise have been available under the treaty. In the absence of a special relationship between the borrower and lender, interest paid to an unconnected bank would not fall foul of such a treaty provision even if the loan is backed by a parental guarantee.
The Revenue introduced alternative arrangements as an interim measure to alleviate the worst problems generated by structuring termination packages in this way. These interim arrangements (detailed in a Press Release of 17 March 1997) which taxed non-cash benefits only when they were received, were optional and available for terminations taking place during 1996-97-1997-98. (Cash awards were already taxable only when they were received.) The response to the interim arrangements led to the issue, in December 1997, of a Consultative Document proposing similar provisions on a statutory basis.
Support for the proposals put forward in the Consultative Document resulted in legislation in the last Finance Act (Section 58 and Schedule 9 FA98). To a large extent the new rules, which tax cash instalments and non-cash benefits in the year in which they are received, build upon the interim arrangements as outlined in the Consultative Document. In addition, some obsolete material (including Part II of Schedule 11 dealing with payments under pre-1981 obligations) has been dropped and the opportunity taken to rewrite the existing legislation in simpler form using techniques developed as part of the Tax Law Rewrite project. This rewrite process does not of itself change the legislation.
The new rules affect all payments and receipts made on or after 6 April 1998 unless there has been a previous charge to tax on them - the commencement provisions are considered in more detail below.
Other (non-termination) payments and benefits (for example, compensation for changes in terms of employment) can fall within Section 148. Such awards are subject to the same new rules - but, for the sake of simplicity, are not referred to explicitly in the following commentary.
However, the house is worth £150,000 when transferred to Gordon. If the house had been given as an emolument from Gordon's employment, the amount chargeable under Section 19 ICTA 1988 would have been £150,000 - its "money's worth".
The value of the house for Section 148 purposes is the greater sum i.e. £150,000.It is important to remember that these rules are used only to measure what the amount of the cash equivalent of a Section 148 benefit is. Rules in Section 596B and Chapter II which deal with other matters are not imported into Section 148 in any way. For example, there are rules (Section 167 ICTA) which apply Chapter II only to directors and higher-paid employees. They are not part of the rules for establishing the amount of a cash equivalent and so do not apply for Section 148 purposes. There is a further example of this point in the section on 'interest relief' below.
The new rules provide equivalent relief for ex-employees where there is a Section 148 charge. This is achieved by treating the cash equivalent as interest paid.
To simplify the operation of PAYE following the move to tax cash payments and non-cash benefits in the year in which they are received, the new rules prescribe that in any tax year any balance of the £30,000 exemption is set first against cash payments in that year. Any balance remaining after off-set against the cash payments made in the year is off-set, at the end of the year, against the aggregate of the non-cash benefits received in the year.
Year 1 Cash payments £20,000; non-cash benefits £6,000.
£20,000 of the £30,000 exemption is set against the £20,000 cash payments and then £6,000 is set against the £6,000 non-cash benefits, leaving £4,000 exemption to carry forward to year 2.
Year 2 Cash payments £15,000; non-cash benefits £8,000.
The £4,000 unused exemption brought forward from year 1 is set against the £15,000 cash payments, leaving £11,000 subject to PAYE. Tax will also be due on the £8,000 non-cash benefits.An employer making a payment liable to PAYE may believe that part of the £30,000 exemption is still available but, at the time of payment, not know the exact cash equivalents of non-cash benefits provided in previous years. In such circumstances the employer should work on the basis of an estimated balance of exemption - calculated by taking into account payments already made and a best estimate of the cash equivalents of non-cash benefits actually provided in previous years. For this purpose it will generally be appropriate to use the estimates provided in the original report, for example where the actual provision of non-cash benefits is the same as that forecast in the original report.
So if, in example M above, the £15,000 cash payment in year 2 is paid very early in that year before the cash equivalents of the year 1 non-cash benefits have been calculated, the employer should simply use a best estimate of the cash equivalent of the year 1 benefits in deciding what part of the £30,000 exemption is available in year 2.
Under the new rules, an employer will not be obliged to send yearly reports. A one-off report will have to be made to the Inland Revenue where an employment is terminated and a settlement is provided with respect to that termination which includes non-cash benefits and is estimated, over its lifetime, to exceed £30,000. So no report is required where the settlement package consists of cash only or, where it includes non-cash benefits, it has an estimated total value of £30,000 or less. The Inland Revenue will not regard employers as having failed in their reporting obligations where, in good faith, a report is not sent about a package including non-cash benefits because it is estimated not to exceed £30,000 but, in the event, without a change in the nature of the package, the £30,000 limit is exceeded.
The report, and a copy to the employee, have to be provided by the 6 July following the tax year in which the termination occurred (in line with the P11D timetable). Subject to this time limit, the employer is free to send the report (and the copy to the employee) at any time after the termination has occurred. There is no prescribed form or format and employers can prepare the reports in the way which best suits their businesses.
Once an employer has sent a report there is no need for any further report unless, exceptionally, there is a significant variation increasing the total value of the package. The Inland Revenue will regard as significant any variation producing an increase in value of more than £10,000. Where there is a significant variation a report of the variation should be made, to the Revenue only, by 6 July following the end of the tax year in which the variation occurs.
There may be some cases where a report is not sent after the end of the year in which termination occurs as, initially, a package containing non-cash benefits is not estimated to exceed £30,000 but later the package is changed so that it still contains non-cash benefits and does exceed £30,000. Where this happens the employer should, by the 6 July following the end of the year in which the package was changed, send a report to the Inland Revenue, with a copy to the employee. The report should be for the year in which termination occurred as if one had been required in the first place. The same approach should be taken where a package initially consisting entirely of cash is varied to incorporate non-cash benefits - producing a mixed package with a total value in excess of £30,000.
The information which should be contained in any termination report is as follows:
The purpose of the report is to provide something against which to check data subsequently produced by ex-employees with respect to payments and benefits received. So in arriving at figures for the cash equivalents of non-cash benefits to be provided in years following the award, so as to determine whether or not the one-off report is needed, employers are required only to produce reasonable estimates, using the rules in force in the year in which the termination occurs.
The copy of the report which is to be sent to employees will help them to complete any self assessment returns sent to them.
Paragraphs 21 to 23 of Schedule 18 to Finance Act 1998 require companies and other concerns within the charge to corporation tax to keep and preserve records. The provisions mirror those in Section 12B Taxes Management Act (TMA) 1970, which brought in, for 1996-97 and subsequent years of assessment, a record keeping requirement for individuals and partnerships. Paragraphs 21 to 23 have effect for accounting periods ending on or after 1 July 1999.
As noted above, these rules apply not only to ordinary limited companies but to all concerns within the charge to corporation tax including for example industrial and provident societies, authorised unit trusts, clubs and societies as well as ordinary limited companies. Except in the paragraph referring to the Companies Act record keeping requirements we use 'companies' as convenient shorthand for all concerns within the charge to corporation tax.
We issued guidance on how Section 12B TMA affects self employed taxpayers in leaflet SA/BK3, 'Self Assessment: a guide to keeping records for the self-employed', published in June 1995.
The leaflet gives guidance on the practical effect of the legislative requirement. In particular, it makes clear that:
The legislation applies primarily to dealings between a UK taxpayer and an associate operating outside the UK. It will generally not be relevant where the parties are unconnected, unless the dealings in question constitute individual transactions within a "series of transactions" to which the legislation applies. And -- with very limited exceptions -- the legislation is of no relevance where the parties to a transaction are both subject to UK tax in respect of it.
Where the transfer pricing legislation may be in point, the records required by Paragraph 21 of Schedule 18 to the Finance Act 1998 to enable a company to deliver a correct and complete return, and to substantiate the figures in the return on enquiry, may well go beyond those required for the purposes of Section 221 Companies Act.
Following extensive consultations, we are also issuing guidance in this issue of Tax Bulletin on how we will interpret and apply the SA documentation requirements for transfer pricing purposes.
Normally, records for an accounting period will have to be preserved for six years from the end of that period. But in three cases they have to be kept for longer. The second and third cases in particular will be very rare in practice.
First, if an enquiry into the return for an accounting period remains open at the six year point the records for that period must be retained until that enquiry is completed.
Secondly, where no such enquiry has been started but the statutory period for doing so has not expired at the six year point (because the return is late) the records for that accounting period must be retained until the latest date for starting an enquiry has passed or, if later, the date such an enquiry is completed.
The third case is where, contrary to the first two situations, the date on which a company is requested to complete a tax return for an accounting period is itself more than six years after the end of that period. In that case the records in existence at that date must be retained as in the second situation, that is until the latest date for starting an enquiry has passed or, if later still, the date such an enquiry is completed.
Preservation of records in an alternative form (see below) should make it easier for some companies to retain their records for this longer period.
Precisely what information needs to be preserved in this way will vary from business to business. But standard information, such as contractual terms and conditions printed on all invoices, need not be reproduced as part of the record of each transaction.
We accept of course that companies which store information in accordance with the Code of Practice on the Legal Admissibility of Information stored in Electronic Document Management Systems (BSI 1996 DISC PD 0008) will thereby automatically satisfy the tax requirements.
The exceptions, where the original record must be retained, are set out in Paragraph 22 of Sch 18 to Finance Act 1998. In essence they consist of vouchers for tax suffered or for tax credits in respect of incomings. But photocopies of foreign tax assessments, rather than the assessments themselves, will remain acceptable for the purposes of claims to double taxation relief in respect of foreign tax underlying dividend income from abroad.
We have given assurances in connection with self assessment for individuals and partnerships that penalties under S12B(5) will only be sought in the more serious cases - where, for example, records have been destroyed deliberately to obstruct an enquiry, or where there has been a history of serious record keeping failures. We are now able to offer equivalent assurances to companies. We can also confirm that a penalty would only be sought from companies, as in the case of individuals and partnerships, following approval by Compliance Division.
But companies which are employers must also preserve PAYE records, that is those additional records created to show that the PAYE system has been operated in a satisfactory manner. Regulation 55(12) of the Income Tax (Employments) Regulations 1993, SI 1993 No. 744, requires these additional PAYE records to be preserved for three years after the end of the tax year to which they relate.
Unlike Paragraph 22 of Sch 18 to the Finance Act 1998, the PAYE regulations do not provide for preservation of information in the records in another form. To help employers we have recently changed our view on the use of optical imaging to preserve such records which were originally created in paper form. Any paper records may now be preserved by the use of optical imaging systems, provided that what is retained is a complete and unaltered image of the underlying paper document.
Most SDRT arises on transfers of dematerialised shares held in CREST, where the SDRT concerned is accounted for centrally through CREST. However not all securities are able to be held in CREST and so SDRT also arises in a variety of other situations. One common example is where such 'residual' securities that have been purchased but not yet delivered are soon sold again and accordingly registered directly into the name of the second purchaser.
Where SDRT arises that is not accounted for in CREST, Regulation 4 of the SDRT Regulations SI 1986 No 1711 (as amended by SI 1997/2430) requires the accountable person to give written notice of each charge to SDRT, and to pay the SDRT due direct to the Inland Revenue, on or before the accountable date.
The written notice (which should set out the date of the agreement, and the parties, securities and consideration involved) should be sent together with the SDRT itself to the Shares Unit of the Stamp Office at the address below.
Where the shares are purchased on an exchange the accountable person, as defined by Regulation 2 of the SDRT Regulations 1986, will be one of the brokers (or qualified dealers) involved in the transaction. Otherwise the purchaser is accountable.
The accountable date is the seventh day of the month following the month in which the trade date of the transaction occurred. Interest is charged from that date on any SDRT paid late.
Penalties apply to late notices under Section 93 Taxes Management Act (TMA) 1970, as applied to SDRT by SI 1986/1711 (as amended by SI 1997/2430). The level of penalties depends on how late the notice is provided as set out below.
However, to prevent the size of the potential penalty being disproportionate to the amount of SDRT involved, the amount of the statutory penalty in relation to each individual transaction will normally be limited to the lesser of:
Whenever an agreement to transfer chargeable securities is not reported before the accountable date the accountable person can now expect to have to account for a maximum penalty of £100 along with interest on the SDRT from the accountable date to the date of payment.
Where a stock transfer form relating to residual securities is stamped within 60 days of the date of the transaction the Stamp Office will not seek interest on the SDRT in the meantime and no notice need be given. This extends the practice set out at the end of paragraph 1.11 of the SDRT Notes for Guidance published in February 1998.
However, should a stock transfer form not in fact be duly stamped within this time then interest on the unpaid SDRT will still run from the accountable date. In addition, if a notice was not delivered by that date the penalties described above will apply.
It should also be noted that if the stock transfer form is presented for stamping more than 30 days after it is executed there may be a penalty for late stamping.
Between September 1994 and October 1996, a number of companies purchased their own shares using a new type of buy back whereby shareholders were invited to sell their shares to an agent for the company: under these arrangements the proceeds became a qualifying distribution in the hands of the vendors, except to the extent that they represented the return to shareholders of the original subscribed capital.
The Section 703 Compliance Unit is investigating shareholders who participated in these buy backs to see if the tax credits paid to them should be recovered under the anti-avoidance provisions at Section 703-9 ICTA 1988 which enables the Revenue to counteract a "tax advantage" (defined at Section 709(1)) obtained in consequence of a "transaction in securities" (Section 709(2)) in any of the circumstances defined at Section 704A-E.
Where an exempt body receives an "abnormal dividend" as a result of selling shares in a buyback, the relevant circumstance is at subsection (a) of Section 704A which catches the receipt of "an abnormal amount by way of dividend [which is] taken into account for . . . . (a) any exemption from tax."
The purpose of this article is to assist those shareholders who may be involved in this investigation by giving the answers to some of the questions which we have most frequently been asked in connection with our enquiries into share buy backs.
On 30 October 1996 Sir John Vinelott, giving judgement in the case of CIR v Universities Superannuation Scheme Ltd (TL 3499) upheld the Revenue's view that a tax exempt body which was entitled to "relief" on the income which arose when it received a distribution in the course of a share buy back had obtained a tax advantage within Section 709(1). This gave us the judicial authority to challenge the new type of share buy back under Section 703. See Tax Bulletin Issue 34 (April 1998) for further comment on the USS decision.
This is why when shares are sold in a buy back, we need to know when they were "first acquired" and how much the shareholder paid for them so we can work out the return represented by the distribution received on the buy back.
There is no statutory definition of a "normal return" or of the extent to which it must be exceeded before the dividend becomes "abnormal". The question of whether a dividend is abnormal is ultimately a question of fact for determination by the Special Commissioners.
In accordance with Section 209(2)(b), the amount of the consideration which is not a distribution is the amount, if any, which represents "repayment of capital on the shares or [which is] equal in amount or value to any new consideration received by the company for the distribution".
The "new consideration" cannot exceed what was given for the shares on their issue and may be less, for example where there has been a subsequent bonus issue: the fact that the shares may later change hands at a different price does not affect the amount of the distribution under Section 209(2)(b). For the purposes of Section 703 -9, the "dividend" is therefore the amount described as "treated as a distribution for the purposes of the Taxes Act" in the vouchers issued by the company by whom the buy back was carried out plus the associated tax credit.
Because Section 704(6)(b) says we must take into account the history of the shares since the date of first acquisition, it was inevitable that some shareholders would be asked for information on their holding in a particular company over a considerable period of time. But in order to keep compliance costs to a minimum, we began by first asking shareholders to provide us with details of transactions in the shares of the relevant company twelve months either side of the buyback. This meant we could eliminate from our enquiries those buy backs where the shareholder appeared to be clearly entitled to the benefit of the Section 703(1) escape clause, for example because the sale of shares in the buy back was part of a series of disposals of shares in the company in question including ordinary on market sales.
It is not sufficient for the purposes of the Section 703 "escape clause" for the shareholder or his fund manager merely to assert that the shares were sold in the ordinary course of making or managing investments and did not have as the obtaining of a tax advantage their main or one of their main objects.
Shareholders should however be aware that as the return is calculated by identifying the shares sold in the buy back with the earliest shares acquired this may not produce the most favourable result for the shareholder.
But where there is no good reason why the shareholder or his agents should not supply information reasonably requested in connection with our enquiries, we may ask the Board of Inland Revenue to use the information powers at Section 708 to require production of the necessary information.
The draft clauses in this Exposure Draft set out the legislation in a clearer and more logical structure while preserving the existing meaning. And as in our first Exposure Draft ("Trading Income of Individuals: Part1") we have used numerous innovative techniques - in particular a new format and layout, shorter sentences, easier to understand language and better signposts.
In rewriting the legislation we have suggested a number of minor changes to the law which would make it simpler and easier to use. We would welcome views on whether these changes should be made.
More generally, we would welcome comments on any of the draft clauses. And there are some issues on which we would be particularly glad to receive views highlighted in the Exposure Draft. The deadline for comments is 30 November 1998. They should be sent to:
Copies of the Exposure Draft can be obtained from Kirsty Platts at the above address. It is also available on the Internet.
There was general acceptance that the document served a useful purpose in allowing readers to evaluate theoretical options in a practical context. But given the subject matter, and the strong views held by many on the subject of purposive drafting, it was perhaps unsurprising that there was little consensus on the usefulness or otherwise of each variant.
On the basis of the responses received we have concluded that to use purposive drafting systematically throughout the rewrite would not be consistent with the project's objective to preserve, in general, the effect of the existing law. There may be some contexts in which a purpose statement may be helpful, but only where the effect is clear and we are confident that it does not change the existing law or risk introducing ambiguity.
A response paper has been produced which summarises the main points made about each variant and our conclusions. This document is also available on our web site or can be obtained by writing to Kirsty Platts at the above address.
On present plans, the rewritten capital allowances legislation will form the first rewrite Bill. We hope that this will be ready for enactment in early 2000.
This means that whenever a tax return form is issued the statutory notice incorporated in that form places a obligation on the recipient to make a return of the information required, in the manner specified. If the completed tax return form delivered to the Revenue is not 'correct and complete' the statutory notice has not been complied with and the relevant sanctions may apply. The relevant sanctions are penalties under either Section 93 TMA 1970 or Section 95 TMA 1970, depending on the nature of the failure and the circumstances in which the failure is identified.
In other cases the fact that the tax return form is incomplete may not come to light until the information in the return is being systematically transferred to our computer database. If so we may try to obtain the missing information from the taxpayer without sending back the return. This would be appropriate where, say, it is clear that there should be an entry in a particular box. But where there is a major omission we send the return back. This might be the case where, for example, we believe the necessary accounts information is incomplete. Whether we send the return back or not, the action we take has but a single purpose - to give the taxpayer the opportunity to rectify the omission.
Giving the taxpayer an opportunity to rectify an omission in such cases is a means of enhancing voluntary compliance. This is because by sending the incomplete tax return form back we are, in effect, opting to help taxpayers meet their obligations rather than penalising them for not doing so.
In the Inland Revenue Press Release of 3 February 1998, Dawn Primarolo, the Financial Secretary to the Treasury announced a concession addressing this issue. The concession provided that taxpayers whose returns were sent back to them (or their agents) in the circumstances described above would still be treated as having met the filing deadline provided they sent back a corrected return within a specified period.
A similar concession will apply for 1997-98 returns. The concession will apply where:
We will be monitoring the operation of the concession this year and, depending on the outcome, may recommend that it is established as a formal Extra Statutory Concession. For the avoidance of doubt it ought to be mentioned that the concession will only apply where the return is incomplete as a result of a genuine oversight. It will not apply where the return is deliberately incomplete, in an attempt to take advantage of the concession. For example, the concession will not apply if a return is deliberately sent in without a relevant set of pages, to buy a little more time to complete those pages. Nor will it apply if a return is deliberately sent in without a signature, to buy a little more time to obtain the signature.
Return submitted on 20 October 1998 and sent back to taxpayer as incomplete on 10 November 1998. Concession not relevant because taxpayer still has until 31 January 1999 to meet filing deadline.
Return submitted on 20 January 1999 and sent back to taxpayer as incomplete on 21 January 1999. Concession means that providing the completed return is sent back to the Revenue by 4 February 1999 the taxpayer will be treated as having met the filing deadline.
Return submitted on 20 January 1999 and sent back to taxpayer as incomplete on 10 February 1999. Concession means that providing the completed return is sent back to the Revenue by 24 February 1999 the taxpayer will be treated as having met the filing deadline.
Return submitted on 20 February 1999 and sent back to taxpayer as incomplete on 21 February 1999. Concession not relevant because return was not sent in on or before the 31 January 1999 filing deadline.
But it has long been realised that there is an unacceptable tension between an absolute requirement to provide correct and final figures and a requirement to provide such information by a certain date. Prior to self assessment the Courts supported the view that the paramount requirement was to comply with the statutory filing obligation and that this may require the taxpayer to use provisional figures in the return (Dunk v General Commissioners for Havant, 51 TC 519; Alexander v General Commissioners for Wallington 65 TC 777). For example:
"If a taxpayer finds particular circumstances that make the best of his knowledge more than usually unreliable, it is open to him to put against his figure for a particular item of income such words as "estimated - see accompanying memorandum", or something of that kind, and explain the circumstances. If he has done his best, and, of course, he is under a duty to use all proper sources of knowledge - he will not, in my view, be guilty of making a false statement, providing, as I say, he puts in a genuine estimate and, if necessary, explains that it is not very reliable." [Goulding, J, in Dunk v General Commissioners for Havant, 51 TC at p521].
'There will be occasions on which some information cannot be finalised within the formal self assessment time limits despite the taxpayers best efforts to do so. In such cases the taxpayer should include a 'best estimate' of the information in the return and, if appropriate, a corresponding estimate of the tax due...... A return containing any such provisional figure will not be regarded as incomplete.'Our views on the use of the continuing application of the Dunk principles are also reflected in the guidance material provided with the SA tax return. For example, there is general advice on the use of provisional figures at page 27 of the main Tax Return Guide:
'Do not delay sending your Tax Return just because you do not have all the information you need. You must do your best to obtain the information, but if you cannot provide final figures by the time you need to send your Tax Return, then estimate the amount.'
The general guidance in the Tax Return guidance tells the taxpayer that 'You must do your best to obtain the information' and goes on to say that we '... will not normally regard a Tax Return as incomplete simply because it contains provisional figures, provided you have taken all reasonable steps to get the final figures, and you ensure that they are sent as soon as they are available'.
It should be clear from this that we expect the taxpayer to have done all they reasonably can to obtain the final figures, or, in the words of Goulding, J., the taxpayer must have '....done his best...'. If a taxpayer has made little or no effort to obtain the final figures before the filing deadline we would argue that a key element of the 'Dunk' principles is absent and the taxpayer has failed to comply with the notice to make a return. Similarly, we would not accept that general pressure of work or the complexity of a taxpayers affairs justify the use of provisional figures. The onus is on the taxpayer (and his agent) to take such factors into account, for example, when considering how long it will take to complete the return.
There is further guidance on the use of provisional figures in the Self-employment pages. This guidance (on page SEN3) allows for the return of a single figure of estimated profit, rather than standard accounts information:
'If you cannot complete the income and expenses section of your Self-employment pages because it is impossible to prepare the figures from which your taxable profit is to be calculated before the latest date for sending your Tax Return, you should provide an estimate of your taxable profit in box 3.88.........'.As is made clear this guidance is to be read in conjunction with the general advice on the use of provisional figures in the main Tax Return Guide. It follows that we expect taxpayers to have done all they reasonably can to obtain the final figures. It was certainly not our intention to accept a single figure of profit when, for example, it was only 'impossible' to prepare final figures because the taxpayer had made little or no effort to have the final figures prepared in time to meet the filing deadline. In such circumstances we would argue that a key element of the 'Dunk' principles is absent and the taxpayer has failed to comply with the notice to make a return. In fact we would expect there to be very few circumstances in which, despite the taxpayer's best efforts, it is genuinely 'impossible' for the taxpayer to provide us with accounts information. The only common circumstance would be where, in the case of a newly commenced business, the first accounting period does not end until close to, or after, the statutory filing date. (By 'close to' we mean within 3 months of the filing date, so for the normal 31 January deadline, that means accounting periods ending on or after 1 November).
Even though there are relatively few circumstances in which it would be acceptable for a single provisional figure of profit to be returned there may be circumstances in which it is acceptable for some, or all, of the standard accounts information to be completed on a provisional basis. For example, there may have been a change of accounting date requiring two sets of accounts to be prepared. If only the earlier set of accounts were final then provisional standard accounts information would be required, pending completion of the second set of accounts. In these and similar circumstances (that is where a provisional figure of profit is estimated by reference to an earlier period of account) we would expect provisional figures for each of the anticipated entries in the standard accounts information.
In practice it is unlikely that we will send back a 1997-98 tax return as incomplete simply because it contains provisional figures. We would prefer to process the return as received and then hold the taxpayer to the obligation to provide final figures as soon as they are available. We will do this by identifying all those returns which contain provisional figures. If the final figures are not provided by the expected date we will take appropriate action to obtain them and in some cases this will mean opening an enquiry. (The guidance in the 1998-99 returns has been clarified along the lines described above).
SP16/91 identifies the circumstances in which we will treat any additional 'accountancy expenses arising out of accounts investigations' as an allowable deduction. It will be obvious from the quote in the previous sentence that the language used in SP16/91 does not reflect self assessment concepts and terminology, and for that reason alone needs to be updated. But the text of SP16/91 is deficient in one other important aspect. In practice we normally disallow accountancy expenses only where the additional profits arise out of negligent or fraudulent conduct. This is not stated explicitly in SP16/91. Instead SP16/91 simply refers to investigations which result in '..a charge to interest or interest and penalties'. This phrase is intended to imply some degree of culpability on the part of the taxpayer (so that, for example, the additional profits attract interest under Section 88 TMA and penalties under Section 95 TMA). But '..without a charge to interest..' could be read as denying a deduction where there is a charge to interest under Section 86 TMA, a charge which could arise in circumstances where there is no suggestion of negligent or fraudulent conduct at all. This is not the intention. We have no reason to believe that this ambiguity has caused any difficulty in the operation of SP16/91. But it becomes much more relevant in the context of self assessment, because there is now just the one interest charging provision, Section 86 TMA.
Until such time as SP16/91 is superseded the text below should be regarded as a statement of our practice, as it applies to self assessment enquiries.
Additional accountancy expenses arising out of an enquiry into the accounts information in a particular year's return will not be allowed where the enquiry reveals discrepancies and additional liabilities for the year of enquiry, or any earlier year, which arise as a result of negligent or fraudulent conduct.
Where, however, the enquiry results in no addition to profits, or an adjustment to the profits for the year of enquiry only and that adjustment does not arise as a result of negligent or fraudulent conduct, the additional accountancy expenses will be allowable.
Typically the examples referred to us concern a taxpayer who has made up accounts for the 12 months to 30.4.96, the 12 months to 30.4.97 and then the 11 months to 31.3.98. The basis period for 1997-98 is the 23 months to 31.3.98 and transitional overlap relief arises in respect of the period 1.5.96 to 5.4.97. Is the relief due 11/23rds of the profits of the basis period, or 11/12ths of the profit of the 12 month account to 30.4.97?
Our view is that the answer is 11/12ths of the profit of the 12 month account to 30.4.97 (or, more accurately, 340/365ths of that profit). In the absence of an account for the 11 months of the transitional overlap period itself a time-based apportionment of the 12 month account to 30.4.97 is the most accurate measure of the relevant profit available to us.
12 months to 30.4.96 £19,000 12 months to 30.4.97 £24,000 11 months to 31.3.98 £15,000 The profit of the basis period for 1997-98 (the 23 months 1.5.96 to 31.3.98) is £39,000 (Section 62(2)(b) ICTA 1988)
The profit of the transitional overlap period (the 340 days 1.5.96 to 5.4.97) is 340/365 x 24,000 = £22,356 (para 2(4) schedule 20, FA 1994).
Strictly the overlap relief available on the change of accounting date to 31.3.98 is 335/340 x 22,356 = £22,027 (Section 63A(1) ICTA 1988). But if the 31 March concession is adopted, to treat the change of accounting date as if a change to 5.4.98, the full £22,356 may be deducted.
Assuming the 31 March concession is adopted the taxable profit for 1997-98 is (39,000 - 22,356) = £16,644 (Section 63A(1) ICTA 1988)
[Note: There is a more detailed explanation of the general principles of apportionment in paras 1.17 to 1.20 of SAT1 (1995). The '31 March' concession is detailed at paras 1.98 to 1.99.]
The boxes for amounts of overlap profit were provided as a convenient means for taxpayers to maintain an accurate record of the amount of relief that will be available in a future year. We have received reports that some agents (and taxpayers) are failing to make entries in the overlap profit carried forward boxes in cases where we would expect entries to be appropriate. Failure to make an appropriate entry does not mean that the entitlement to relief is lost as it ought to be possible to establish the correct position in a future year. But it would be preferable for all concerned if the correct figures were established in the year in which the overlap arises. Where a return has already been sent in a Section 9(4)(b) TMA 1970 amendment should be considered.
Self assessment does not alter our policy of considering the imposition of a penalty under Section 95 or 95A TMA 1970 whenever there is evidence that the taxpayer has acted negligently or fraudulently, even if the error first comes to light as a result of an amendment under Section 9(4) TMA 1970, or Section 12(AB)(2) TMA 1970, rather than as the result of an enquiry under Section 9A TMA 1970. Any such penalty would be based on the difference between the amount of tax correctly payable and the amount that would have been payable if the original return had been correct.
A payment made under Deed of Covenant to a charity is not effective for tax purposes unless it is a 'like' annual payment. We have interpreted this word, based on a series of tax cases, to mean that the covenantor must have a real and continuing commitment to make payments under the Deed, and that there must be a constant element in each payment made.
A series of payments of equal amount will satisfy this interpretation, but covenantors may be concerned that the value of their donations will decrease over the period of the covenant. One way to avoid this is to make an initial payment which is then uplifted in succeeding years by a set percentage, or in line with the Retail Prices Index. We have, however, advised charities and donors that payments are not 'like' if the Deed allows for an initial fixed payment followed by payments increased in accordance with a formula.
We have reconsidered this advice. We now accept that payments under a Deed of Covenant which allows for an initial payment followed by payments based on a formula are 'like' payments provided:
Questions about this article or Deeds of Covenant should be addressed to:
Under the old Corporation Tax Schedule A rules (which applied up to 31 March 1998), the Revenue took the view that service charges received by flat management companies were normally within the scope of Schedule A notwithstanding the provisions of Section 42 LTA 1987. This was because the charge under old Schedule A was based on the receipts to which a landlord was entitled in a chargeable period (old Section 15(1) paragraph 2 Income and Corporation Taxes Act (ICTA) 1988). However, where service charges received by occupier controlled flat management companies were matched over a period of up to five years by admissible expenses, no Schedule A charge was normally imposed (see Property Income Manual paragraph 5095 published externally under Open Government).
We have been asked whether the position has changed under the new Schedule A rules introduced by Section 38 and Schedule 5 FA 1998. Under new Schedule A, it is necessary to consider the profits of the Schedule A business (calculated, in the first instance, in accordance with Schedule D Case I rules and correct accountancy principles). As from 1 April 1998, residential service charges received by occupier controlled flat management companies will ordinarily be outside the scope of Schedule A since, under correct accountancy principles, it will not usually be correct to include in the computation of profits sums to which the landlord is not beneficially entitled.
Consequently, where residential service charges are received by an occupier controlled flat management company for periods subsequent to 31 March 1998, such sums will ordinarily be received as capital in the landlord's capacity as trustee (under Section 42 LTA 1987). Investment income arising on such sums held in a designated bank account will be chargeable on the trustee at the rate applicable to trusts (Section 42 contains an implied power to accumulate).
Rents receivable by flat management companies (such as ground rents - other than peppercorn rents) are outside the scope of Section 42 LTA 1987 and remain chargeable under Schedule A.
This article sets out the line the Revenue will take for all flat management companies as from 1 April 1998 but no action will ordinarily be taken to disturb the treatment accepted on specific cases prior to that date.
Where a trust return has not previously been made by flat management companies of investment income arising from a fund within Section 42 LTA 1987 (or from funds otherwise specifically held on trust), the trustees will have the normal obligation to notify chargeability.
Until recently, such individuals have been allocated either the emergency code, or a code giving full personal allowances on a Week 1/Month 1 basis. Unfortunately this does not result in the correct tax deductions under PAYE and further tax is likely to arise when such individuals calculate their tax due under Self Assessment. So tax offices are now allocating code OT to these individuals for the year of arrival. This should ensure that the correct tax deductions are made for the year.
There is to be no change to the treatment we have applied in respect of those non-resident individuals who are entitled to claim personal allowances.
A major aspect of examining syndicate accounts is considering how much of the re-insurance to close (RITC) premiums paid by syndicates are allowable deductions in arriving at the profits for tax purposes. One of the issues under discussion is whether the allowable deduction should be restricted to the net present value of the reinsured liabilities, to reflect the fact that the syndicate to whom the premium is paid (the reinsurer syndicate) will receive the investment return on the premium. This principle is referred to as discounting. The effect of discounting is to increase the profit of a syndicate paying an RITC, and to correspondingly reduce the income of the reinsurer syndicate.
For syndicates where agreement has not been reached the Revenue has issued a determination of the taxable profits based on its view of how much of the RITC premium is allowable for tax purposes. Syndicate managing agents have the right to appeal against these determinations (although the Names who are members of the syndicate do not) and these appeals can either be settled by agreement or be determined by the Commissioners.
Lloyd's Members Services Unit (MSU) have issued taxation advices (forms CTA1) to Names which show the two profit figures, one using the Revenue determinations, and the other based on syndicate managing agents' views of the tax adjusted results. The results for the 1994 account are reported by Names on self assessment returns for the year ended 5 April 1998. The Revenue has been asked by taxpayers and their advisers how the discussions regarding the 1994 syndicate result will affect the Lloyd's Pages of their self assessment returns and the answers to some of the more common questions are shown below:
When completing the syndicate results box on your Lloyd's Pages you should decide where between those limits you think your figure for syndicate profits will lie. This will be a provisional entry on the tax return and you should tick box 22.3 to show that this is the case. Advice regarding provisional figures can be found at page 27 of the Self Assessment Tax Return Guide for the year ended 5 April 1998.
It is important that any revised figure is notified to the Revenue as quickly as possible. If there is undue delay, say beyond 3 months after the issue of the final CTA1, you may be liable to pay a penalty.
Relief cannot be gained on contributions paid outside the normal time limits.
(ii) if the final profits are lower than the provisional figure I used what happens to the contributions that no longer qualify for relief?
Any excess premiums paid under a personal pension scheme should be repaid by the scheme administrator.
If pension payments have started before the final figure is available you will need to contact the Revenue so that the level of payments can be reviewed by the scheme administrator.
Will I need to make any changes to the transfer I have made to my New Special Reserve Fund (NSRF)?
No, the amount you can transfer to your NSRF from the profits of the 1994 account is based on the commercial results (which are not affected by the discounting question) and not the tax adjusted results.
For many of these clubs their only taxable income is investment income which is taxed at source and prior to April 1996 they had no further tax to pay. However, since that date when the rate of tax deducted at source on some savings income was reduced to 20 per cent, they have been left with small net liabilities of just a few pence, to account for the shortfall with the small companies rate of corporation tax.
Following a review, the Revenue issued fresh guidance to all tax offices so that where certain criteria are met annual returns will no longer be sent to clubs to account for trivial liabilities.
This will also apply in certain circumstances to property management companies, although it specifically excludes any income arising on sinking funds and other assets held on trust. For more information on this subject please see the article on Flat Management Companies on pages 598.
The guidance material is included in the corporation tax instructions at paragraph CT11328. It lists the types of clubs which are specifically excluded, and also the range of requirements which eligible clubs must fulfil. For example any club which provides financial facilities or carries on a trade is excluded.
We still receive occasional complaints from agents and club officials that there is inconsistency in the treatment of these cases, and if readers believe that they have found an instance of that, they should refer the local Inspector to this article.
Update No 39 is about the following matters:
Update No 41 reports details of the main measures announced in the Budget to stop abuses of the pensions tax reliefs by some pension schemes. These include countering attempts to avoid the 40% tax charge under Section 591C Income and Corporation Taxes Act (ICTA) 1988 when certain retirement benefits schemes lose their approval and, in relation to small self-administered schemes, strengthening the role of the pensioneer trustee. The Update also covers a number of other matters including some discretionary practice changes associated with the anti avoidance measures, the announcement of the increase in the "permitted maximum" under Section 590C ICTA 1988 to £87,600 for the year 1998-99 and various Budget changes applicable to personal pension schemes. The Budget changes are now incorporated in the Finance Act 1998.
Update No 42 announces the revision of the de minimis limit which is contained in the Association of British Insurers (ABI) Guidance Notes "Maximum Permissible Funding Rates on Earmarked Contracts" and is referred to in paragraph 13.9 of the Practice Notes IR12 (1997). The Update also provides clarification of the position regarding continuous service and concurrent employments in an attempt to reduce inappropriate claims for continuous service in respect of controlling directors where the employments have been concurrent rather than consecutive.
Update No 43 sets out the Inland Revenue's views of the consequences of foreclosure on loans made direct to the employer, in relation to a wholly insured scheme, by the Life Office and the actions that are expected from the trustee(s) of the scheme if approval of the scheme is not to be lost.
Update No 44 is concerned with customer service issues. It makes an apology to customers on the PSO Mailing List who have experienced problems in relation to the receipt of Updates; it sets out the PSO's main performance results for 1997-98 and the Office's targets for 1998-99; advises of the application by the PSO for the renewal of the Charter Mark; and sets out all the relevant enquiry numbers that customers may wish to contact in the PSO.
|Number||Title||Date of Issue|
|C31||Scientific Research Associations||04/09/98|
|02/98||Business By Telephone||24/08/98|
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