Tax Bulletin 62

Contents

Interpretations

Miscellaneous

Do Not Be Taxed By Return Deadline

Your clients face a £100 penalty - and further penalties of up to £60 a day along with recovery action - if their SA Returns and payments do not reach the Department in time. And late Returns are more likely to be selected for enquiry.
So please ensure your clients give you the details you need to handle their Returns in time to beat the deadline.

Changes To The "Hansard" Procedure

Introduction

You may be familiar with the term, the "Hansard" procedure. For those who are not, this is a process by which the Inland Revenue offers a taxpayer suspected of serious tax fraud an opportunity to confess to all, if any, of the irregularities in their tax affairs. The term "Hansard" is used, because the practice of the Board of Inland Revenue is set out in a statement by the Chancellor of the Exchequer in the Parliamentary Hansard records.

Hansard is a long established concept and its origins can be traced back to the latter part of the First World War. It first appears in Hansard by way of a lengthy written answer by Sir W. Johnson Hicks, in the House of Commons 19 July 1923. Over the years there have only been minor changes and the Hansard practice has survived a number of challenges in the Courts.

From time to time the Chancellor of the day updates the Hansard statement to reflect the latest practice of the Inland Revenue. This article reports that the Chancellor has recently made a revised statement; it looks at the main changes and the reasons behind these. It also announces changes in the Inland Revenue's Code of Practice number 9, which provides further information about these types of investigations.

Background

The Hansard procedure was last updated by the then Chancellor, the Rt Hon John Major M.P., on 18th October 1990. In answering a Parliamentary Question about the practice of the Board of Inland Revenue with regard to instituting criminal proceedings in case of suspected tax fraud, he gave the following statement:

"The practice of the Board of Inland Revenue in cases of tax fraud is as follows:-

The Board may accept a money settlement instead of instituting criminal proceedings in respect of fraud alleged to have been committed by a taxpayer.

They can give no undertaking that they will accept a money settlement and refrain from instituting criminal proceedings even if the case is one in which the taxpayer has made a full confession and has given full facilities for investigation of the facts. They reserve to themselves full discretion in all cases as to the course they pursue.

But in considering whether to accept a money settlement or to institute criminal proceedings, it is their practice to be influenced by the fact that the taxpayer has made a full confession and has given full facilities for investigation into his affairs and for examination of such books, papers, documents or information as the Board may consider necessary".

This statement includes an indication that a taxpayer who makes a full confession and who co-operates fully with the Inland Revenue during their investigations can expect that the matter will be dealt with on a civil basis, rather than criminal proceedings being taken against them. But the statement is not explicit on the matter and the taxpayer is left with no absolute assurance that the Board of the Inland Revenue will not institute criminal proceedings even in these circumstances.

Statements by the Lords

More recently, the House of Lords has considered the case of "R v Allen". In this case the appellant claimed that the admission into evidence of statements made in response to the Hansard procedure breached his right to a fair trial under Article 6(1) of the European Convention of Human Rights. This, he claimed, was because he had been subjected to an inducement at the time when the statements were made. The inducement in question was said to be the assurance implicit in the Hansard statement that if the taxpayer makes a full confession criminal proceedings would not be instituted against him.

There was, however, a flaw in the argument advanced by the appellant. As Lord Hutton explained:

"To the extent that there was an inducement contained in the Hansard statement, the inducement was to give true and accurate information to the Revenue, but the accused … did not respond to that inducement and instead of giving true and accurate information gave false information. Therefore, in my opinion, the appellant's argument … that he was induced by the hope of non-institution of criminal proceedings held out by the Revenue to provide the schedule and that its provision was, therefore, involuntary is invalid".

In other words, the whole basis of the appellant's argument was founded on a false premise. The facts of the appellant's case did not engage the legal argument advanced on his behalf because the appellant had not made full disclosure in accordance with the terms of the Hansard statement.

Lord Hutton pointed out that the position would have been different if the appellant had made full disclosure to the Inland Revenue in response to the Hansard statement.

"If, in response to the Hansard statement, the appellant had given true and accurate information which disclosed that he had earlier cheated the Revenue and had been prosecuted for that earlier dishonesty, he would have had a strong argument that the criminal proceedings were unfair and an even stronger argument that the Crown should not rely on evidence of his admission, but that is the reverse of what actually occurred".

A Full Confession

The conclusion to be drawn from Lord Hutton's remarks is that a taxpayer invited under the Hansard procedure to make a full confession, who unlike the appellant in this case actually did so, would be hard done by if the Revenue then subsequently prosecuted him or her anyway. This would be particularly true if the Revenue used his confession as evidence in court.

These remarks are significant in terms of the Hansard statement. The Board of the Inland Revenue had previously reserved to itself full discretion as to the course of action it would take in any case. Lord Hutton took the view, however, that in cases of a full confession under Hansard, the Revenue would be unfair to prosecute, effectively placing a limit on the full discretion of the Revenue in this matter.

As significant as these points are, in practical terms there is no record of any case in which a taxpayer who has made a full confession under Hansard being prosecuted for these offences later. The substantive point is how assured the taxpayer can be that the Revenue will not prosecute in these circumstances.

It is important to stress that the Hansard procedure invites a full and complete confession. Deliberate failure to disclose errors or omissions may result in criminal prosecution. Depending upon the facts of the particular case and the admissibility of evidence before the Courts, it is possible that someone who only admits to part of the irregularities could face criminal charges not only in relation to the matters undisclosed or misrepresented but also the matters disclosed.

Full Co-operation

A further element to be taken into account according to the previous version of Hansard is whether the taxpayer had given full co-operation to the Revenue during the investigation. This includes the giving of full facilities for investigation into his affairs and for examination of such books, papers, documents or information as the Board may consider necessary. A taxpayer could conclude from this, that even in cases of a full confession, if the right amount of co-operation is not offered, then he or she remains at the risk of prosecution.

Again in practice there have been no cases of the Revenue prosecuting in these circumstances. It has considered instead the fullness of the confession made under Hansard when deciding on subsequent prosecution action. It is a matter for the taxpayer to decide whether or not to co-operate with the investigation and the extent of that co-operation. If the matter remains civil, the Revenue will, however, take the degree of co-operation into account in determining any penalties which may be applicable.

It must however be made clear that the Board does not hold out the opportunity of Hansard indefinitely. So, for example, if a taxpayer who had been given Hansard took an unreasonable amount of time in making their full disclosure, the Inland Revenue may decide to commence its own investigation. Depending upon the information held or obtained by the Inland Revenue, this may lead at any time to the withdrawal of Hansard and the start of an investigation with a view to criminal prosecution. If this happened a full confession subsequently made by the taxpayer would not by itself prevent the Board from continuing to pursue the prosecution.

A Revised Hansard Statement

There has been a revised statement about the Board of the Inland Revenue's policy on these matters. The response to a Parliamentary Question to the Chancellor on 7th November 2002 was:

"Further to the statement made on 18th October 1990 at column 882 by the then Chancellor, the Rt. Hon. John Major, the practice of the Board of Inland Revenue in cases of suspected serious tax fraud is as follows:-

The Board reserves complete discretion to pursue prosecutions in the circumstances it considers appropriate.

Where serious tax fraud has been committed, the Board may accept a money settlement instead of pursuing a criminal prosecution.

The Board will accept a money settlement and will not pursue a criminal prosecution, if the taxpayer, in response to being given a copy of this Statement by an authorised officer, makes a full and complete confession of all tax irregularities".

The significant points to note are that a taxpayer making a full confession under this procedure may now be assured that the Inland Revenue will not pursue a criminal prosecution. The term "pursue" is used because the Revenue is a prosecuting body in its own right only in England and Wales. In Scotland and in Northern Ireland it refers cases to the Procurator Fiscal and the Director of Public Prosecutions, respectively, for their consideration.

The revised text refers to a copy of the Statement being given by an authorised officer. For these purposes, an authorised officer is a current serving member of the Inland Revenue Special Compliance Office. A copy of the Hansard Statement will normally be given at the first meeting with the taxpayer after the case has been taken up for investigation under Code of Practice 9.

The Hansard procedure is explained in the Inland Revenue Code of Practice 9. This has been substantially updated as a result of the revised Statement. (There have also been some consequential changes to Code of Practice 8, which deals with cases where serious fraud is not suspected). One of the key changes is to make clear that it is for the taxpayer to decide whether to co-operate with the investigation and that in making this decision the taxpayer may seek the help of a professional advisor. The Code of Practice also makes clear that any information that the taxpayer does provide may be used in any subsequent proceedings to determine tax, interest and penalties. As stated above, if the case is concluded by way of a money settlement, the level of co-operation will be one of the factors taken into account in deciding the amount of any penalties.

These changes will have immediate effect and so taxpayers subjected to the Hansard procedure will be read the revised text from now on. Copies of the revised Codes of Practice will be available soon from the Inland Revenue.

interpretations

superseded by CG 17953i to CG 17953r & CG 53113 to CG 53120

Taxation Of Chargeable Gains-taper relief and exemption for disposals by companies with substantial shareholdings: meaning of 'trading company', 'trading group', 'trading sub-group' , 'holding group' and related issues - paragraphs 22(1),22A and 22B of Schedule A1 and paragraphs 20,21,22 and 26 of Schedule 7ac to the Taxation of Chargeable Gains Act 1992.

We have been asked to offer guidance on the meaning of certain statutory terms for the purposes of Capital Gains Tax taper relief and the new exemption for disposals by companies with substantial shareholdings. This article provides that guidance. The relevant legislation was enacted by Finance Act 2002. Words in italics in this article denote expressions that are defined in the legislation.

Introduction

Tax Bulletin 53 (June 2001) [TB53] included an article which explained the Inland Revenue's approach to interpreting the meaning of trading company and holding company of a trading group for the purposes of taper relief. Paragraphs 9 and 10 of Schedule 10 to Finance Act 2002 have revised the definitions of trading company and trading group for taper relief purposes for periods of ownership from 17 April 2002. There is also a new definition of holding company (see paragraph 4 of Schedule 10). Further, the qualifications for investment in a joint venture company as they affect the question as to whether a company or group was a trading company or trading group during a period have been relaxed (see paragraphs 11 and 12 of Schedule 10). The definitions described in TB 53 therefore now apply only for periods of ownership before 17 April 2002 even where the disposal takes place on or after that date.

Finance Act 2002 also introduced Schedule 7AC into the Taxation of Chargeable Gains Act [TCGA] 1992. This brings in an exemption regime for disposals by companies with substantial shareholdings [SSE]. The SSE legislation employs some of the same concepts as taper relief (e.g. trading company, trading group). Other definitions (e.g. trading subgroup) are relevant only to SSE.

This article considers further the meanings of these and other expressions in the light of the legislation introduced by Finance Act 2002 and, in particular, confirms that:

  • Although the definition of company for taper relief is not identical to that used for SSE and the definition of a group of companies for taper relief is different from that of a group for SSE, the definitions of trading company and trading group are essentially common to both regimes.
  • for taper relief, the changes to the wording of the definitions of trading company and trading group align the statute with existing practice. They are not intended to alter the substance of the original definitions, or to have different meanings before and on or after 17 April 2002.

Subject to the different meanings of company and group in the two regimes, the explanations in this article apply equally to both reliefs. They draw on the existing guidance in TB53, which continues to apply for taper relief in respect of periods of ownership before 17 April 2002. Because the essentials of the definitions of trading company and trading group for taper relief remain the same, much of what was said in TB53 is repeated here although the text has been updated to reflect the new wording of the legislation.

The legislation

Taper Relief: Shares as business assets and qualifying companies
Paragraph 4 of Schedule A1 TCGA 1992 sets out the conditions for shares to qualify as business assets and paragraph 6 of Schedule A1 (as amended by section 67 Finance Act 2000) sets out the rules for a company to be a qualifying company in relation to a person making a disposal of shares in a company. Where a company is a qualifying company in relation to that person the business assets rate of taper relief may be due wholly or in part on any chargeable gain arising on the disposal. The question as to whether a company is a qualifying company may also be relevant to persons who dispose of assets used for a trade carried on by a company.

Substantial shareholdings

The SSE legislation provides that from 1 April 2002 disposals of shares (or interests in shares or assets related to shares - as defined in paragraphs 29 and 30 of Schedule 7AC TCGA 1992) by companies with substantial shareholdings do not result in chargeable gains, or allowable losses, provided certain conditions are met. Two of these conditions are that, at certain times determined by reference to the date of the disposal in question

  • the company making the disposal is a member of a trading group or, if not a member of a group, is a trading company;
  • the shares are in a company that is itself a trading company, or the holding company of either a trading group or a trading subgroup.

Definitions and interpretations

Trading company

A trading company is "… a company carrying on trading activities whose activities do not include to a substantial extent activities other than trading activities" (paragraph 22A(1) of Schedule A1 TCGA 1992 and paragraph 20(1) of Schedule 7AC TCGA 1992).

Holding company, group and subgroup

For taper relief, paragraph 22(1) of Schedule A1 TCGA 1992 defines a group of companies as "… a company which has one or more 51% subsidiaries, together with those subsidiaries". For periods of ownership from 17 April 2002, paragraph 22(1) of Schedule A1 defines a holding company as "… a company that has one or more 51% subsidiaries". The previous definition, which applies for such periods prior to that date, makes it necessary to determine the extent of a company's business (excluding its own trade, if any) which consists of holding shares in its 51% subsidiaries. A company is a holding company at any time prior to 17 April 2002 when its business consists wholly or mainly of holding shares in its 51% subsidiaries. This test does not apply for periods of ownership from 17 April 2002. From that date, a company is a "holding company" at any time when it has a 51% subsidiary.

In the SSE regime a holding company is defined differently to encompass subgroups as well as groups. But holding companies are defined in essentially the same way for both taper and SSE purposes. Paragraph 26 of Schedule 7AC defines a group and membership of a group by reference to the normal capital gains group rules in section 170 TCGA 1992 except that references in section 170 to 75% subsidiaries are replaced by references to 51% subsidiaries. Paragraph 26 defines a subgroup as a collection of companies that would themselves form an SSE group but for the fact that one of them is a 51% subsidiary of another company. A holding company is then defined

  • for an SSE group, as the company described in section 170 TCGA 1992 as the principal company of the group, and
  • for a subgroup, as the company that would be the holding company of an SSE group but for the fact that it is a 51% subsidiary of another company.

The taper relief and SSE legislation define a 51% subsidiary by reference to the meaning given by section 838 of the Income and Corporation Taxes Act (ICTA) 1988 (see paragraph 22(1) of Schedule A1 TCGA 1992 for taper relief and paragraph 26(4) of Schedule 7AC TCGA 1992 for SSE). A company is a 51% subsidiary of another company for taper relief and SSE purposes if the second company owns directly or indirectly more than 50% of the ordinary share capital of the first company.

Ordinary share capital is defined for the purposes of the Tax Acts (which includes the provisions relating to corporation tax) in section 832(1) ICTA 1988 (this is applied for the purposes of Schedule A1 TCGA 1992 by paragraph 22(1) of that Schedule). The meaning is extended for the purposes of the definition of 51% subsidiary which applies for SSE purposes (but not for taper relief purposes) to include any share capital of a registered industrial and provident society (see paragraph 26(4) of Schedule 7AC TCGA 1992). Some companies do not have ordinary share capital (e.g. some Limited Liability Companies in the United States, see Tax Bulletin 51). Such companies cannot therefore be 51% subsidiaries of other companies.

Trading group and trading subgroup

Paragraph 22B(1) of Schedule A1 TCGA 1992, for taper relief, and paragraph 21 of Schedule 7AC TCGA 1992, for SSE, define what is a trading group in the same terms. The definition parallels that of a trading company so that a trading group is a group one or more of whose members carries on trading activities provided the activities of the group as a whole do not include, to a substantial extent, activities other than trading activities. The activities of the members of a group are treated as one business. Intra-group activities are disregarded for the purpose of determining whether the group is a trading group. So, for example, where one group company lets a property to another group company, the letting activity would be disregarded for this purpose. However, this netting off approach does not extend to transactions with joint venture companies that are not members of the group. So, letting property to such a joint venture company would count as an activity of the lessor.

In identifying companies whose shares might qualify for SSE exemption the concept of a trading subgroup is used to describe part of a group. It is defined in paragraph 22 of Schedule 7AC in the same way as a trading group, but with references to trading group changed to trading subgroup where appropriate. Intra-subgroup activities are disregarded in the same way as intra-group activities when determining whether a subgroup is a trading subgroup. However, intra-group activities between a member of the subgroup and another group company that is not in the subgroup are not disregarded in considering the status of the subgroup.

Trading activities

Paragraphs 22A and 22B of Schedule A1 TCGA 1992 and paragraphs 20, 21 and 22 of Schedule 7AC TCGA 1992 define trading activities. For a company/group/subgroup these are activities carried on by the company/a member of the group/subgroup

(a) in the course of, or for the purposes of, a trade being carried on by it/any member of the group/subgroup,

(b) for the purposes of a trade that it/any member of the group/subgroup is preparing to carry on,

(c) with a view to its/any member of the group/subgroup acquiring or starting to carry on a trade, or

(d) with a view to its/any member of the group/subgroup acquiring a significant interest in the share capital of another company that -

(i) is a trading company or the holding company of a trading group (or a trading subgroup in SSE), and

(ii) if the acquiring company is a member of a group, is not a member of that group.

However, activities within (c) and (d) count as trading activities only if the company/group member/subgroup member starts to carry on the trade, or acquires the shares, as soon as is reasonably practicable in the circumstances. For the purposes of (d) a significant interest is such an interest as

  • would make the company acquired a member of the same group/subgroup as the acquiring company, or
  • would result in the acquiring company having a qualifying shareholding in a joint venture company without making the two companies members of the same group (see paragraph 23 of Schedule A1 for taper relief and paragraph 24 of Schedule 7AC for SSE for definitions of qualifying shareholding and joint venture company).

The word 'activities' is not defined in the statute but in this context we interpret it to mean what a company does. Activities will therefore include engaging in trading operations, making and holding investments, planning, holding meetings and so forth. The legislation makes explicit that a company may have trading activities both when it is trading and before it commences to trade.

Trade

The following are trades for the purposes of taper relief and SSE:

  • anything that is a trade, profession or vocation within the meaning of the Income Tax Acts and is conducted on a commercial basis with a view to the realisation of profits (paragraph 22(1) of Schedule A1 TCGA 1992 and paragraph 27 of Schedule 7AC TCGA 1992), and
  • any Schedule A business (within the meaning of ICTA 1988) which consists in the commercial letting of holiday accommodation in the United Kingdom (section 241(3) TCGA 1992 as amended by paragraph 3 of Schedule 8 to Finance Act 2002).

We confirm that activities, such as farming, that are treated as a trade by section 53 ICTA 1988, are trades for the purposes of the Income Tax Acts.

In the course of, or for the purposes of, a trade

We accept that an activity is carried on in the course of, or for the purposes of, a trade if it is carried on in the process of conducting or preparing to carry on the trade. So, for example, where a company renegotiates an ongoing trading contract relating to its trade this will be an activity undertaken "in the course of" its trade. It will be clear in most cases whether an activity that a company undertakes is carried on in the course of, or for the purposes of, its trade or not. But similar transactions can be undertaken for different reasons depending on the facts.

For instance, a company may buy some land. If the company is a property developer and buys the land as trading stock, or a manufacturer and buys it to provide a site for a factory it intends to build to house its manufacturing process, the buying of the land would probably count as a trading activity. However, if a company buys the land so as to earn future rental income, or for potential capital growth, the buying of the land would not normally be a trading activity.

Normally, making an investment that yields investment income would not count as a trading activity. However, there are a number of circumstances where such activities could be undertaken in the course of, or for the purposes of, a company's trade.

An investment may be so closely related to the conduct of a trade that it effectively forms an integral part of the trade. For example, a travel agent may be required to keep a fixed level of cash on deposit for bonding requirements. Or a company might receive a large payment, perhaps from selling a shareholding or on the completion of a major contract, and earmark the funds for some particular trade purposes, such as to meet some demonstrable trading liability or expand the trade in the near future. The short-term lodgement of such surplus funds, for example in an interest-bearing deposit account or in bonds or equities, could count as a trading activity. Alternatively, the company may intend distributing the monies received to its members.

Depending on the facts, temporarily investing such funds until they can be distributed could count as being an activity undertaken for the purposes of the company's trade, since paying out the profits generated by a trade can count as a trading activity. This would be the case, for example, where the payment of an annual dividend depended on a meeting of the company's shareholders. Whether or not making and holding investments are part of a company's trading activities is a question of fact that can be determined only by reference to all the relevant circumstances.

Preparing to carry on a trade

The legislation specifically provides that trading activities include activities for the purposes of a trade that a company is preparing to carry on. This encompasses the situation where a particular trade is about to be started but the company has to carry out certain activities first. It also covers cases where an existing trade, which is currently being carried on by another person, will be acquired. The trading activities here may include one or more of: developing a business plan for carrying on the trade, acquiring premises, hiring staff, ordering materials and incurring pre-trading expenditure for the purposes of the trade to be carried on.

Acquiring or starting to carry on a trade, or acquiring shares in a trading company

Activities that a company undertakes with a view to acquiring or starting to carry on a trade, or acquiring a significant interest in the share capital of a trading company, may count as trading activities.
It is quite common for a company to dispose of its trade (or main trading subsidiary) and to invest (or put on deposit) the cash proceeds while it looks around to acquire a new trade or trading subsidiary. A company, group or subgroup temporarily in this position and actively seeking to acquire a new trade or trading subsidiary might still be a trading company, trading company or trading subgroup if it does not have substantial non-trading activities.

Trading activities here include assessing the potential viability of a trade which the company, group or subgroup is considering carrying on and other such activities even though they are not directly preparatory to the carrying on of the particular trade under consideration. So, a company, group or subgroup which has surplus cash that it intends to use to acquire a trade, or to start up one from scratch, which is actively evaluating a number of possible trades may be engaged in trading activities. However, such activities are trading activities only if an acquisition is made, or a new trade is commenced, as soon as is reasonably practicable in the circumstances.

As soon as is reasonably practicable in the circumstances

Rather than impose a fixed time limit, the legislation allows companies whatever time is reasonable, having regard to the particular circumstances, to prepare to carry on a new trade or to acquire a trade or trading company. What is reasonably practicable in the circumstances will depend on the facts in each case. For example, a company may be in negotiations to acquire a trading company but owing to circumstances beyond its control the purchase is delayed. There might be, for example, a problem with the vendor proving title to the company's assets. In such a case we would not suggest that the acquisition had not been made as soon as was reasonably practicable in the circumstances where this was the reason for the delay.

Substantial

Most companies groups and subgroups will have some activities that are not trading activities. The legislation provides that such companies and groups still count as trading if their activities "… do not include to a substantial extent activities other than trading activities". The phrase substantial extent is used in various parts of the TCGA 1992 to provide some flexibility in interpreting a provision without opening the door to widespread abuse. We consider that substantial in this context means more than 20%. The numerical tests in the SSE legislation for a shareholding to be a substantial shareholding refer to 10% or more, but this use of the word substantial is specifically applied only for the purpose of deciding whether a company holds a substantial shareholding in another company (paragraph 8(1) of Schedule 7AC TCGA 1992).
How should a company's non-trading activities be measured to assess whether they are substantial? Some or all of the following are among the measures that might be taken into account in reviewing a particular company's status.

Income from non-trading activities

For example, a company may have a trade but also let an investment property. If the company's receipts from the letting are substantial in comparison to its combined trading and letting receipts then, on this measure in isolation, the company would probably not be a trading company.

The asset base of the company

If the value of a company's non-trading assets is substantial in comparison with its total assets then again, on this measure, this could point towards it not being a trading company. If a company retains an asset it previously used, but no longer uses, for the purposes of its trade, this may not be a trading activity (but see below regarding surplus trading premises). In some cases it might be appropriate to take account of intangible assets (e.g. goodwill) that are not shown on a balance sheet in considering a company's assets. Current market value and amounts given by way of consideration for assets may both be appropriate measures of the relative extents of a company's trading and other activities. Which measure is appropriate will depend on the facts in each case.

Expenses incurred, or time spent, by officers and employees of the company in undertaking its activities.

For example, if a substantial proportion of the expenses of a company were to be incurred on non-trading activities then, on this measure, the company would not be a trading company. Or a company may devote a substantial amount of its staff resources, by time or costs incurred, to non-trading activities.
The company's history may be relevant. For example, at a particular instant certain receipts may be substantial compared to total receipts but, if looked at on a longer timescale, they may not be substantial compared to other receipts over that longer period. Looked at in this context, therefore, a company might be able to show that it was a trading company over a period, even where that period may have included particular points in time when, for example, non-trade receipts amounted to a substantial proportion of total receipts.

It may be that some indicators point in one direction and others the opposite way. We would weigh up the impact of each of the measures in the context of an individual case. If the Inspector was unable to agree the status of a particular company for a period then the issue could be established only as a question of fact before the Commissioners. However, we anticipate that such cases will be relatively rare.

Surplus trading property

We have been asked how property owned by a company and surplus to its immediate business requirements should be dealt with. Each case would need to be considered in light of the facts. We would not, for example, regard the following as necessarily indicating a non- trading activity:

  • letting part of the trading premises;
  • letting properties that are no longer required for the purpose of the trade in question, where the company's objective is to sell those properties;
  • subletting property where it would be impractical or uneconomic in terms of the trade to assign or surrender the lease. For example, the benefit derived from disposing of the lease may be outweighed by the reverse premium payable;
  • the acquisition of property (whether vacant or already let) where it can be shown that the intention is that it will be brought into use for trading activities.

Investments in joint venture companies

Where a company has a qualifying shareholding in a joint venture company (as defined in paragraph 23 of Schedule A1 TCGA 1992 for taper relief and in paragraph 24 of Schedule 7AC TCGA 1992 for SSE) then, provided the joint venture company is not in the same group as the company,

  • the holding of any shares or securities that the company holds in the joint venture company is disregarded, and
  • the company is treated as carrying on a proportion of the activities of the joint venture company equal to the proportion of that company's ordinary share capital it holds

in determining whether: (a) the company is a trading company, (b) a group that the company is a member of is a trading group, and (c) the company is the holding company of a trading group or trading subgroup.

Shares and other assets held otherwise than as investments

Companies may acquire shares or other assets for reasons other than investment. For example, companies may be paid in shares instead of cash as fees for services rendered or work carried out. Once such shares have been acquired the reasons for retaining them will need to be considered in order to determine whether or not their retention means that a company has non-trading activities. Among other issues, we should need to know the reasons why the shares were taken in settling a trade debt and whether they can reasonably be turned into cash or otherwise exchanged to meet trading requirements.
A company may have to hold shares in another company as a pre-requisite to trading (for example, companies may be expected to own shares in a trade organisation). In such cases we should want to know the reasons for holding such a share in order to determine whether the holding was a trading activity.

Corporate Venturing Scheme [CVS]

Investments in shares made under the CVS are investments like any others and the holding of such shares is unlikely to count as a trading activity in its own right. However, the CVS works in such a way that a company that qualifies for CVS investment relief is unlikely to have more than the 20% non-trading activity that would stop it being a trading company for taper relief and SSE purposes.

What to do if you want to know if a company is a trading company or the holding company of a trading group or subgroup

If you want to establish whether a company in which you held shares was a qualifying company for taper relief purposes while you owned the shares, our advice is that, in the first instance, you should seek advice from the company. The company will usually be able to tell you if its activities were such that it was a trading company (or the holding company of a trading group) so that it could have been a qualifying company so far as you were concerned.

Similarly, if a corporate shareholder planning to sell shares in a company wants some indication of whether that company is a trading company (or the holding company of a trading group or trading subgroup) for SSE purposes, it should ask the company concerned.

In either case, the responsibility for ascertaining the status of a company referred to in your tax return rests with you and you will need to take a view and make your return on this basis: you may wish, where applicable, to point out in the return that you made an unsuccessful approach to the company for confirmation of its status. Alternatively, the Inspector dealing with your returns may be able to provide a post-transaction ruling under the Code of Practice 10 procedures. For reasons of confidentiality the Inspector dealing with the company's tax affairs will not be able to correspond with you regarding its status.
A company may wish to establish its status for various reasons:

  • so that it can tell its non-corporate shareholders when it has been a trading company (or the holding company of a trading group) for taper relief purposes;
  • when it is planning to sell shares, the gain on the disposal may be exempted by the SSE legislation and it wants to know if it may qualify as a sole trading company (or a member of a trading group) for SSE purposes during the period specified in paragraph 18(1) of Schedule 7AC TCGA 1992;
  • when its corporate shareholders are planning to sell shares in the company and the gain on the disposal may be exempted by the SSE legislation, the shareholders may want to know if the company may qualify as a trading company (or the holding company of a trading group or trading subgroup) for SSE purpose during the period specified in paragraph 19(1) of Schedule 7AC.

In these circumstances Inspectors will, where there is uncertainty as to the company's status, respond to requests for their view in accordance with Code of Practice 10 and this article.

Any opinion that a company is or is not a trading company, a group is a trading group or a subgroup is a trading subgroup can relate only to the period under consideration. It is possible for a company, group or subgroup to change its status at any time, as its business or activities change.

Inspectors will usually be able to give a firm opinion on the status of a company for periods that have ended where all the relevant facts have been provided. Any view expressed which relates to a time for which facts are not yet available will be subject to revision. Future events may put a different perspective on the true nature of the activities of a company, group or subgroup during a previous period.

Because of the inherent difficulty in giving a view based on uncertain information, in some cases those involved may prefer to wait until all the relevant facts are known before approaching the Inspector.
So that the company's Inspector can form a view, the company should set out for its Inspector:

  • the reason why it is seeking the Inspector's opinion and the period over which the company wants the Inspector to consider its status;
  • all the facts that the company considers relevant in measuring the extent of its trading and its non trading activities and, where appropriate, the assumptions it has made in describing what it expects its activities to comprise over the part of the period falling after the latest point for which data is available;
  • why the company considers that there is uncertainty as to its status;
  • the company's conclusion as to its status, and why it considers, if applicable, that the measures that point in that direction outweigh those pointing in the opposite direction; and
  • (for SSE purposes) what disposal is being contemplated and when it is expected that the transaction will be completed.

The Inspector will offer his or her opinion whenever this is practicable and, if this differs from the company's view, explain the reasons for that difference.

Partnerships and loan relationships

FA 2002 inserted a new paragraph 19 into Schedule 9 FA 1996 to deal comprehensively with cases where a company is a member of a partnership and a money debt (which includes a loan relationship) is owed by or to the partnership. Each company partner computes separately loan relationship debits and credits arising on the money debt.

For this purpose paragraph 19(4) Schedule 9 deems that the money debt is owed by or to the company partner, and that everything done by the partnership in relation to the debt has been done by the company.
The company then computes the debits and credits ("the gross debits and credits") that arise from applying the loan relationships rules to this deemed situation. The company partner brings into account a proportion of these gross debits and credits, the proportion being determined by reference to the partner's interest in the partnership.

We have been asked whether paragraph 19(4) means that you effectively ignore the existence of the partnership. The question arises in two circumstances:

  • the company partner and the partnership have different accounting dates, or
  • the functional currency of the partnership differs from that of the company partner. For example, a company that prepares accounts in sterling may have an investment in a partnership that prepares financial statements in US dollars.

Our view is that paragraph 19(4) requires the company partner to imagine itself as "standing in the shoes" of the partnership. The company is not required to substitute its own accounting date, or its own functional currency, for that of the partnership.

Case law on deeming provisions shows that the application of a "statutory fiction" should be carried only so far as is necessary for the purposes of the statute. The purpose of the deeming exercise in paragraph 19(4) is to compute the debits or credits accruing to the company partner, in a way that takes account of the particular circumstances of that company. There is no need, in doing this, to pretend that the partnership does not exist at all.

Example 1 illustrates how a company partner's loan relationships debits and credits are calculated where its accounting date differs from that of the partnership. Example 2 illustrates the computation where the partnership has a different functional currency.

Example 1

X Ltd is a trading company with an accounting date of 31 December. It is a partner in a partnership P, which prepares accounts to 31 March. It does not account for its investment in P on a mark to market basis.

On 1 May 2003, the partnership acquires a zero coupon bond (issued by an unconnected company). The partnership accounts for the bond on an accruals basis. Its accounts show a credit of £50,000 in the year to 31 March 2004 in respect of accrued discount on the bond, and a similar credit of £80,000 in the year to 31 March 2005.

X Ltd is entitled to 50% of the profits of P in the year to 31 March 2004, but to only 25% in the year to 31 March 2005.

Step 1 - calculate gross credits

Under paragraph 19(4), the "gross credits" are computed as if the zero coupon bond were a creditor loan relationship to which X Ltd is a party for the purposes of its own trade. The company must account for this deemed loan relationship on an authorised accruals basis (paragraph 19(10)). X Ltd (and any other company partner) computes "gross credits" for periods of account ending on 31 March.

X Ltd therefore has gross trading loan relationship credits of £50,000 in the year to 31 March 2004, and £80,000 in the year to 31 March 2005.

The company is not required to work out the discount that would accrue on the bond in year ended 31 December 2003, or subsequent accounting periods.

Step 2 - compute the "appropriate share" of gross credits for each AP of X Ltd

Paragraph 19(6) says that apportionment of gross credits between partners is to be according to the shares that would be found by S114(2) ICTA88. Although paragraph 19(2) disapplies S114(1) ICTA88 where loan relationships are concerned, the apportionment rules in S114(2) continue to apply, including the provision for apportioning profits or losses to the corresponding accounting periods of the company.

X Ltd's apportioned credits are £25,000 (50% x £50,000) for the year to 31 March 2004, and £20,000 (25% x £80,000) for the year to 31 March 2005.

X Ltd will therefore need to time-apportion these sums between its own accounting periods, and bring in:

Year ended 31 December 2003: 275/366 x £25,000 = £18,784

Year ended 31 December 2004: (91/366 x £25,000) + (275/365 x £20,000) = £21,284

Example 2

Y plc is entitled to 40% of the profits of a partnership, Q. Y plc accounts in sterling; partnership Q accounts in dollars. Both Y plc and Q prepare accounts to 31 December. Y plc uses the closing rate/net investment method to translate its investment in the partnership, using an average exchange rate for the year to translate its share of Q's profit into sterling.

In the year to 31 December 2004, Q borrows $5 million from a bank. The bank is not connected with Y plc or any other company partner. Interest of $200,000 is payable on the loan during the period.
During the year the partnership sold goods to a customer for €10,000. The invoice remained unpaid at the year end. Q translated the trade debt into dollars at the year end, bringing into its accounts an exchange gain of $500.

Step 1 - calculate gross debits and credits

The gross debits and credits are calculated in the functional currency of the partnership. Paragraph 19(10) requires an authorised accruals basis to be used. Thus there is a debit of $200,000 in respect of the loan interest. S100(1) and (2) FA96 also requires exchange differences on the Euro trade debt (which is a money debt, but not a loan relationship) to be accounted for under the loan relationships rules. This gives rise to a gross credit of $500.

Step 2 - apportion gross debits and credits to the company partner

Since Y plc is entitled to 40% of partnership profits, it must bring into account a debit of $80,000 and a credit of $200 (or a net amount of $79,800). In accordance with S94AB(1) and (2) FA93, this is translated into sterling at the rate used in Y plc's accounts to translate the partnership profits. If the average rate used is, say, $1.6/£, Y plc would show a loan relationship debit of £49,875 (79,800 divided by 1.6) in its tax computations.

Similar principles apply where a partnership is a party to a derivative contract (paragraph 49 Sch 26 FA 2002).

Miscellaneous

Certificates of UK Residence For Companies

1. This article explains the circumstances in which the Inland Revenue will certify that a company is a resident of the United Kingdom for the purpose of double taxation agreements (DTAs) entered into by the UK. It does not consider the position of individuals.

Residence as a condition in DTAs for obtaining relief from tax

2. The relevant DTA should always be considered in a particular case. But the following is the general pattern under the UK's DTAs.

3. A company may claim relief from another State's tax under the DTA between the UK and that State only if it meets one or more conditions. The first is that the company is "a resident of the UK" for the purpose of the DTA in question.

4. Under Article 4(1) of a typical DTA a company will be a resident of the UK if, under the laws of the UK, it is liable to tax in the UK by reason of its domicile, residence, place of management, place of incorporation or any other criterion of a similar nature.

5. A company that is incorporated in the UK is resident here under domestic law (Section 66 FA 1988) unless

o it migrated with Treasury consent before 15 March 1988, continues to carry on a business and is centrally managed and controlled outside the UK; or

o it is treated as not resident in the UK by virtue of Section 249 FA 1994 (under which a company is treated as non-resident if it is so treated for the purposes of a DTA - see paragraphs 22-24 below).

6. Being a resident of the UK may be the only general condition for claiming relief from the tax of another State, eg if the company has manufacturing or retailing profits and it does not have in the other State a permanent establishment, as defined in the DTA, to which the profits are attributable.

7. But if the company derives dividends, interest or royalties from the other State, then another condition will usually have to be met. This is that the company is either the beneficial owner of the income in question, or is subject to tax in the UK in respect of the income. Some DTAs have both tests.

Examining claims under DTAs

8. The Inland Revenue can be expected to take reasonable steps to support companies that are residents of the UK in their legitimate claims to relief from the tax of another State with which the UK has entered into a DTA; just as companies that are residents of the other State will expect the tax authorities of that State to support them in their legitimate claims to relief from UK tax under the DTA.

9. If a UK company claims relief from the tax of another State under the DTA between the UK and that State, the other State will verify that the conditions for relief are met and will ask appropriate questions if the position is not immediately clear.

10. However, the Inland Revenue must take reasonable precautions against statements made by it being used to obtain relief from another State's tax if that relief is not due. It is important that we do not jeopardise our relations with other States. We have a responsibility to the generality of UK taxpayers to maintain the UK's reputation in this area.

11. We will therefore, as necessary, ask a company for information that we need to verify the accuracy of statements that we are asked to make in support of its claim to relief from another State's tax under a DTA. And we will not support a claim to relief where we have information which shows that the claim may not be valid.

12. For example, having regard to paragraphs 6 and 7 above, a residence certificate will not be given if the profits or income in question are not profits or income of the UK company concerned. This will be the case if, for example, it acts as an agent for another person rather than as principal. We have also seen cases where a UK company has lent its name to a transaction when the beneficial owner of the profits or income resulting from that transaction is a different person.

13. It would be wrong for us to certify the residence status of a UK-incorporated company if the certificate is likely to be used to support a claim to relief from another State's tax in such circumstances, since the proper person to claim such relief is the person who is the beneficial owner of the income. This would be the case even if the UK company was rewarded by the other person, for example by a payment of commission or for the use of its name, since this would not be the income that was the subject of the claim under the DTA. It would also be wrong to certify UK residence if we have insufficient information to form a view on whether the profits or income concerned are profits or income of the UK company or not.

Certifying that a company is UK resident

14. If we are asked to certify that a company is UK resident, we will need to know the use to which such a certificate will be put before providing it.

15. For example, if a company requires a letter simply confirming that it is registered with the Inland Revenue in order to be allowed to do business in another State, the person dealing with the company's affairs can provide a letter stating that they are dealt with in his or her office. Such a letter should make it clear that it is not a certificate of UK residence, since this is not relevant to the company's request.

16. However, a company might want to use a certificate of UK residence in order to claim relief, under the DTA between the UK and another State, from tax that would otherwise be payable in that State.

17. The person dealing with the company's affairs will normally first check the Double Taxation Relief Manual to see if the other State has provided a form for claiming relief from its tax on the income in question. This may be the case especially with dividends, interest and royalties.

18. If the Manual indicates that such a form exists, the company must make its claim using it and, as appropriate, ask the Inland Revenue to certify its residence status on the form. The other State will have designed the form with the intention that it should be used in relation to the types of income in question, and we will not undermine its administrative procedures by providing a letter certifying UK residence instead.

19. But if the other State does not provide a form for use in the circumstances of the case, the company might ask for a letter certifying that the company is a resident of the UK for the purposes of the DTA.

20. In either situation, for the reasons given in paragraphs 10-13 we must be sure that the Inland Revenue does not support a claim to relief that could not be justified. A company requesting a letter certifying UK residence should provide details of the nature of the proposed transaction and the income concerned. If they are not provided, we will normally ask for them. We will also check the relevant DTA to make sure that there is no obvious reason why the company could not claim the relief. We will not certify UK residence if we think that to do so could mislead the other State into thinking that the Inland Revenue believes that the relief is due if this is not the case.

21. It should usually, for example in the case of established companies whose tax affairs are well known to us, be possible to certify that a UK-incorporated company that is clearly the beneficial owner of the income that is the subject of the claim under the DTA (and/or, depending on the terms of the DTA, is subject to tax in the UK in respect of the income) is a resident of the UK for the purpose of claiming relief under the DTA in respect of that income.

22. However, it should not be overlooked that the company, even though UK-incorporated, could also be resident in another State under that State's domestic law. Such a company would then be dually resident. If there is a DTA between the UK and the other State it may contain a tie-breaker test, stating typically that a company that is a resident of both States under their respective domestic laws shall, for the purposes of the DTA between them, be deemed to be a resident only of the State in which its place of effective management is situated. Where this is situated is a question of fact.

23. If the company's place of effective management is in the other State, it would not then be regarded as a resident of the UK for the purposes of the DTA between the UK and that State. And (except for the purposes of the controlled foreign company rules in certain situations - Section 747(1B) ICTA 1988, inserted by FA 2002) under Section 249 FA 1994 the company would not be regarded as resident in the UK under domestic law either. Consequently it would not be a resident of the UK for the purposes of any other DTA that the UK has entered into.

24. The lack, or limited extent, of presence or activities in the UK might be an indication that the company is effectively managed outside the UK, and that it is therefore a dual resident company, with the consequences described above. If a UK-incorporated company does not seem to have much or any presence or activities in the UK, we will not certify that the company is a resident of the UK for the purposes of domestic law or of a DTA if we

  • have reasonable grounds for believing that the company may be effectively managed in, and hence may be resident in, a State other than the UK with which the UK has a DTA with a tie-breaker test for dual resident companies; or
  • have insufficient information to make a decision one way or the other.

25. With regard to the first of those points, the residence status of the company's directors (including shadow directors) and the ultimate beneficial shareholders may be a matter about which we properly seek information in this connection.

26. A company seeking a certificate of UK residence should, however, be able to provide sufficient information to show where it is effectively managed if we ask about the point. Revenue Policy, International (Company Residence) can, if required, provide advice and guidance in applying the established facts in particular cases to the tie-breaker wording in any DTA.

27. With regard to the second of the points in paragraph 24, all we can reasonably certify is that the company is incorporated in the UK but that we are unable to confirm its residence status for purposes of DTAs concluded by the UK.

Exchange of information

28. If the person dealing with a company's affairs has information about its connections with, or business dealings in, another State that he or she thinks may be of interest to that State, he or she will arrange for that information to be sent to the other State using the prescribed competent authority procedures, according to the terms of the exchange of information Article in the UK's DTA with that State or, where appropriate, under the EC Mutual Assistance Directive (paragraphs 350 onwards of the Double Taxation Relief Manual). Information will be sent spontaneously as well as at the request of the other State. This will include cases where a certificate of residence has been provided and it is subsequently claimed, or it becomes clear, that the transaction in respect of which it was given did not take place.

Important changes to National Insurance contributions (NICs) from 6 April 2003 From 6 April 2003

Employee NICs are due:

  • at 11 per cent (or the appropriate contracted out rate) on earnings from the Primary Threshold to the Upper Earnings Limit and
  • at 1 per cent on all earnings that exceed the Upper Earnings Limit

Employer NICs are due at 12.8 per cent (or appropriate contracted-out rate up to UEL) on all earnings above the secondary threshold.

Self-employed Class 4 NICs are due at 8 per cent on profits or gains between the Lower Profits Limit and the Upper Profits Limit and at 1 per cent above the upper limit.

The introduction of the new structure means that the calculation of the annual maximum will change (regulations will be published shortly). This has implications for deferment cases. In general people who are presently able to defer payment of NICs will continue to do so. However, they will pay NICs at 1 per cent on all earnings or profits/gains above the Primary Threshold/Lower Profits Limit for employments/self-employment where deferment has been allowed.

(No longer relevant)
Corporation Tax on Chargeable Gains: Indexation Allowance: Error in Internet tables

Companies and other bodies within the charge to corporation tax are able to apply an indexation allowance to allowable expenditure when computing their chargeable gains. (For gains chargeable to capital gains tax, indexation was frozen in April 1998 when taper relief came into effect.) Each month we publish tables on the internet showing the allowances relating to disposals in the previous month, depending on the date of expenditure. The tables appear on our website at www.inlandrevenue.gov.uk/rates/cgt.htm.

There was an error in some of the tables we published earlier this year. We regret that some of the figures were wrong and apologise for any inconvenience this may have caused. The error affects only the indexation allowance computed for assets disposed of between 1 February and 31 July 2002 (inclusive). We have since corrected the figures in the internet tables.

We are identifying cases where taxpayers had already submitted tax returns using these wrong figures; we will then contact those taxpayers. Companies which before 21 September 2002 (the first full day on which the correct figures were shown) took indexation factors from our website for February to July 2002 are asked to replace them with the correct figures.

Who is affected?

Any company (or other body within the charge to corporation tax on chargeable gains) that has

- already computed a chargeable gain on a disposal of assets occurring between 1 February 2002 and 31 July 2002 (inclusive), and

- used the figures in the indexation tables published on our website before 21 September 2002,

is potentially affected, dependent upon when expenditure on the asset was incurred.

Individuals, trustees and personal representatives of the deceased are not affected.

What is the error?

Some indexation factors on our tables have been shown as "Nil" when there should have been a positive indexation factor. So chargeable gains calculated using the information were larger than if the correct figures had been used.

The Retail Prices Index (RPI) figure shown at the top of each month's table was correct.

What computations are affected?

The computations of chargeable gains which may have been affected are those:

- relating to asset disposals taking place in the period between 1 February 2002 and 31 July 2002 (inclusive), and

- requiring a computation of indexation allowance on expenditure incurred in the period between 1 May 2001 and 31 December 2001 (inclusive).

To check on the exact months of expenditure affected please see the summary table below. There is also a set of "nil" entries that remains correct.

Summary Table

The revised entries are set out aside. In each case the original incorrect tables showed the indexation factor to be 'Nil'. If a cell is blank, then the original figure is still right.

Expenditure in 2001   Disposals in 2002
February March April May June

July

May

  0.002 0.009 0.011 0.011

0.010

June

  0.001 0.007 0.010 0.010

0.009

July

         

 

August

  0.003 0.010 0.013 0.013

0.011

September     0.006 0.009 0.009 0.007
October   0.001 0.008 0.011 0.011 0.009
November 0.001 0.005 0.012 0.015 0.015 0.013

December

0.002 0.006 0.013 0.016 0.016

0.014

Valid 'Nil' entries

The Nil entries in the table below were correctly reported as "Nil" or zero in the original tables.

Expenditure in 2001

Disposals in 2002

Jan Feb March April May June

July

May Nil Nil          
June Nil Nil          
July Nil            
August Nil Nil          
September Nil Nil Nil        
October Nil Nil          

November

Nil          

 

December

Nil          

 

 

Expenditure in 2002

           

 

January

           

 

February

           

 

March

           

 

April

           

 

May           Nil Nil
June             Nil

Are the published figures now right?

We corrected the error and published revised tables on our website during the afternoon of 20 September 2002.

What is the Inland Revenue doing to ensure taxpayers do not lose out?

Companies which have already submitted a tax return

We will identify tax returns that have been submitted that include a disposal where the indexation allowance has been calculated using an erroneous indexation factor.
We will write to the company (or its agent) to let it know.
We will ask it to write back with an amended figure.

Companies which have yet to submit a tax return

When we check returns received in the future we will look out for cases where indexation allowance was calculated using an erroneous indexation factor.

What should I do?

Companies which have already submitted a tax return

You do not have to do anything to find error cases. We will write to you if we find that a tax return contains a calculation based on an erroneous indexation factor.

If you believe you have made a tax return using an erroneous indexation factor, and you have not heard from us by the end of December 2002, please contact your tax office.

If you prefer, you can write to your tax office now with the replacement calculation if you know that you have used an erroneous indexation factor.

Companies which have yet to submit a tax return

Please ensure that you use the revised indexation tables that are now on our website if you have made disposals in the period February to July 2002.

What should I do if I did not realise in time that this affected my company?

If you have not discovered the error within the normal window for amending returns, you can make a claim for 'error or mistake relief'. Your tax office will advise you on how you should proceed.

How did this error happen?

Under section 54 of the Taxation of Chargeable Gains Act 1992, no indexation factor is applied if it is less than zero.

So when the movement in the retail prices index was negative, we over-rode the formula for calculating the indexation factor and showed the word 'Nil' instead.

When we updated the spreadsheet for the following month's figures we did not work out the indexation factor for cells where the factor had been nil in the preceding month.

Will it happen again?

We have changed the spreadsheet used to create the tables each month. Now the formula is not over-ridden and 'Nil' entries are generated automatically.

We have also re-written the operating instructions that accompany the spreadsheet.

Where can I get more information?

Please contact your tax office for help in your particular case.

no longer current-due to deletion of article in TB 46Update to article in TB46

"Information Powers and Legal Advice"

The article in TB46 "Information Powers and Legal Advice" explained our view on the question of claims to professional or legal privilege which are sometimes made in response to requests for information.

The article explained our practice, based on our understanding of the law, with regard to the circumstances in which production to the inspector of documentation for the purpose of seeking and giving legal advice on tax matters may be sought under the information powers in Sections 19A and 20 Taxes Management Act 1970 and Paragraph 27, Schedule 18 Finance Act 1998. The article covered all such legal advice whether or not it is given by lawyers.

The article took account of the Special Commissioners decision in An Applicant and An Inspector of Taxes (SpC 189) that there is no automatic exclusion from the scope of Section 20(1)(a) for documents subject to legal professional privilege, which was subsequently confirmed by the Divisional Court and the Court of Appeal in R v Special Commissioner, ex parte Morgan Grenfell & Co Ltd.

The decision of the lower courts was overturned by the House of Lords on 16 May 2002. The House of Lords held that documents subject to the legal professional privilege of the person under enquiry are excluded from the scope of Section 20(1)(a).

We accept that the same reasoning applies to all the information powers in Sections 19A and 20 Taxes Management Act 1970 and Paragraph 27, Schedule 18 Finance Act 1998.

The article in TB46 must therefore be read subject to the proviso that documents subject to the legal professional privilege of the person under enquiry are excluded from the scope of these information powers.
Inland Revenue Statements of Practice and Extra-Statutory Concessions issued between 1 October 2002 and 30 November 2002

Extra Statutory Concessions

There have been no Extra Statutory Concessions for this period

Statements of Practice
Number Title Date
SP5/2002 Exemptions for companies gains on substantial shareholdings
- sole or main benefit test
- Paragraph 5 Sch 7AC Taxation of Chargable Gains Act 1992
29/10/02

You can get copies of SPs and ESCs by telephoning 020 7438 4266.

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 issued 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.
  • 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, Mr Shell Makwana, Room G7, New Wing, Somerset House, Strand, London, WC2R 1LB or e-mail Shell.Makwana@ir.gsi.gov.uk. 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 2002 is £22. 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 information regarding Tax Bulletin subscription or distribution please contact Mr Bryan Kearney, Room G7, New Wing, Somerset House, Strand, London, WC2R 1LB. Telephone: 020 7438 6373. For more general information regarding Tax Bulletin, please contact Mrs Jayne Harler, Assistant Editor, on 020 7438 7842 or at the address provided above.

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 Miss Glenda Bishop, Room G12, New Wing, Somerset House, Strand, London, WC2R 1LB.

Contents

Interpretations

Miscellaneous

Do Not Be Taxed By Return Deadline

Your clients face a £100 penalty - and further penalties of up to £60 a day along with recovery action - if their SA Returns and payments do not reach the Department in time. And late Returns are more likely to be selected for enquiry.
So please ensure your clients give you the details you need to handle their Returns in time to beat the deadline.

Changes To The "Hansard" Procedure

Introduction

You may be familiar with the term, the "Hansard" procedure. For those who are not, this is a process by which the Inland Revenue offers a taxpayer suspected of serious tax fraud an opportunity to confess to all, if any, of the irregularities in their tax affairs. The term "Hansard" is used, because the practice of the Board of Inland Revenue is set out in a statement by the Chancellor of the Exchequer in the Parliamentary Hansard records.

Hansard is a long established concept and its origins can be traced back to the latter part of the First World War. It first appears in Hansard by way of a lengthy written answer by Sir W. Johnson Hicks, in the House of Commons 19 July 1923. Over the years there have only been minor changes and the Hansard practice has survived a number of challenges in the Courts.

From time to time the Chancellor of the day updates the Hansard statement to reflect the latest practice of the Inland Revenue. This article reports that the Chancellor has recently made a revised statement; it looks at the main changes and the reasons behind these. It also announces changes in the Inland Revenue's Code of Practice number 9, which provides further information about these types of investigations.

Background

The Hansard procedure was last updated by the then Chancellor, the Rt Hon John Major M.P., on 18th October 1990. In answering a Parliamentary Question about the practice of the Board of Inland Revenue with regard to instituting criminal proceedings in case of suspected tax fraud, he gave the following statement:

"The practice of the Board of Inland Revenue in cases of tax fraud is as follows:-

The Board may accept a money settlement instead of instituting criminal proceedings in respect of fraud alleged to have been committed by a taxpayer.

They can give no undertaking that they will accept a money settlement and refrain from instituting criminal proceedings even if the case is one in which the taxpayer has made a full confession and has given full facilities for investigation of the facts. They reserve to themselves full discretion in all cases as to the course they pursue.

But in considering whether to accept a money settlement or to institute criminal proceedings, it is their practice to be influenced by the fact that the taxpayer has made a full confession and has given full facilities for investigation into his affairs and for examination of such books, papers, documents or information as the Board may consider necessary".

This statement includes an indication that a taxpayer who makes a full confession and who co-operates fully with the Inland Revenue during their investigations can expect that the matter will be dealt with on a civil basis, rather than criminal proceedings being taken against them. But the statement is not explicit on the matter and the taxpayer is left with no absolute assurance that the Board of the Inland Revenue will not institute criminal proceedings even in these circumstances.

Statements by the Lords

More recently, the House of Lords has considered the case of "R v Allen". In this case the appellant claimed that the admission into evidence of statements made in response to the Hansard procedure breached his right to a fair trial under Article 6(1) of the European Convention of Human Rights. This, he claimed, was because he had been subjected to an inducement at the time when the statements were made. The inducement in question was said to be the assurance implicit in the Hansard statement that if the taxpayer makes a full confession criminal proceedings would not be instituted against him.

There was, however, a flaw in the argument advanced by the appellant. As Lord Hutton explained:

"To the extent that there was an inducement contained in the Hansard statement, the inducement was to give true and accurate information to the Revenue, but the accused … did not respond to that inducement and instead of giving true and accurate information gave false information. Therefore, in my opinion, the appellant's argument … that he was induced by the hope of non-institution of criminal proceedings held out by the Revenue to provide the schedule and that its provision was, therefore, involuntary is invalid".

In other words, the whole basis of the appellant's argument was founded on a false premise. The facts of the appellant's case did not engage the legal argument advanced on his behalf because the appellant had not made full disclosure in accordance with the terms of the Hansard statement.

Lord Hutton pointed out that the position would have been different if the appellant had made full disclosure to the Inland Revenue in response to the Hansard statement.

"If, in response to the Hansard statement, the appellant had given true and accurate information which disclosed that he had earlier cheated the Revenue and had been prosecuted for that earlier dishonesty, he would have had a strong argument that the criminal proceedings were unfair and an even stronger argument that the Crown should not rely on evidence of his admission, but that is the reverse of what actually occurred".

A Full Confession

The conclusion to be drawn from Lord Hutton's remarks is that a taxpayer invited under the Hansard procedure to make a full confession, who unlike the appellant in this case actually did so, would be hard done by if the Revenue then subsequently prosecuted him or her anyway. This would be particularly true if the Revenue used his confession as evidence in court.

These remarks are significant in terms of the Hansard statement. The Board of the Inland Revenue had previously reserved to itself full discretion as to the course of action it would take in any case. Lord Hutton took the view, however, that in cases of a full confession under Hansard, the Revenue would be unfair to prosecute, effectively placing a limit on the full discretion of the Revenue in this matter.

As significant as these points are, in practical terms there is no record of any case in which a taxpayer who has made a full confession under Hansard being prosecuted for these offences later. The substantive point is how assured the taxpayer can be that the Revenue will not prosecute in these circumstances.

It is important to stress that the Hansard procedure invites a full and complete confession. Deliberate failure to disclose errors or omissions may result in criminal prosecution. Depending upon the facts of the particular case and the admissibility of evidence before the Courts, it is possible that someone who only admits to part of the irregularities could face criminal charges not only in relation to the matters undisclosed or misrepresented but also the matters disclosed.

Full Co-operation

A further element to be taken into account according to the previous version of Hansard is whether the taxpayer had given full co-operation to the Revenue during the investigation. This includes the giving of full facilities for investigation into his affairs and for examination of such books, papers, documents or information as the Board may consider necessary. A taxpayer could conclude from this, that even in cases of a full confession, if the right amount of co-operation is not offered, then he or she remains at the risk of prosecution.

Again in practice there have been no cases of the Revenue prosecuting in these circumstances. It has considered instead the fullness of the confession made under Hansard when deciding on subsequent prosecution action. It is a matter for the taxpayer to decide whether or not to co-operate with the investigation and the extent of that co-operation. If the matter remains civil, the Revenue will, however, take the degree of co-operation into account in determining any penalties which may be applicable.

It must however be made clear that the Board does not hold out the opportunity of Hansard indefinitely. So, for example, if a taxpayer who had been given Hansard took an unreasonable amount of time in making their full disclosure, the Inland Revenue may decide to commence its own investigation. Depending upon the information held or obtained by the Inland Revenue, this may lead at any time to the withdrawal of Hansard and the start of an investigation with a view to criminal prosecution. If this happened a full confession subsequently made by the taxpayer would not by itself prevent the Board from continuing to pursue the prosecution.

A Revised Hansard Statement

There has been a revised statement about the Board of the Inland Revenue's policy on these matters. The response to a Parliamentary Question to the Chancellor on 7th November 2002 was:

"Further to the statement made on 18th October 1990 at column 882 by the then Chancellor, the Rt. Hon. John Major, the practice of the Board of Inland Revenue in cases of suspected serious tax fraud is as follows:-

The Board reserves complete discretion to pursue prosecutions in the circumstances it considers appropriate.

Where serious tax fraud has been committed, the Board may accept a money settlement instead of pursuing a criminal prosecution.

The Board will accept a money settlement and will not pursue a criminal prosecution, if the taxpayer, in response to being given a copy of this Statement by an authorised officer, makes a full and complete confession of all tax irregularities".

The significant points to note are that a taxpayer making a full confession under this procedure may now be assured that the Inland Revenue will not pursue a criminal prosecution. The term "pursue" is used because the Revenue is a prosecuting body in its own right only in England and Wales. In Scotland and in Northern Ireland it refers cases to the Procurator Fiscal and the Director of Public Prosecutions, respectively, for their consideration.

The revised text refers to a copy of the Statement being given by an authorised officer. For these purposes, an authorised officer is a current serving member of the Inland Revenue Special Compliance Office. A copy of the Hansard Statement will normally be given at the first meeting with the taxpayer after the case has been taken up for investigation under Code of Practice 9.

The Hansard procedure is explained in the Inland Revenue Code of Practice 9. This has been substantially updated as a result of the revised Statement. (There have also been some consequential changes to Code of Practice 8, which deals with cases where serious fraud is not suspected). One of the key changes is to make clear that it is for the taxpayer to decide whether to co-operate with the investigation and that in making this decision the taxpayer may seek the help of a professional advisor. The Code of Practice also makes clear that any information that the taxpayer does provide may be used in any subsequent proceedings to determine tax, interest and penalties. As stated above, if the case is concluded by way of a money settlement, the level of co-operation will be one of the factors taken into account in deciding the amount of any penalties.

These changes will have immediate effect and so taxpayers subjected to the Hansard procedure will be read the revised text from now on. Copies of the revised Codes of Practice will be available soon from the Inland Revenue.

interpretations

Taxation Of Chargeable Gains-taper relief and exemption for disposals by companies with substantial shareholdings: meaning of 'trading company', 'trading group', 'trading sub-group' , 'holding group' and related issues - paragraphs 22(1),22A and 22B of Schedule A1 and paragraphs 20,21,22 and 26 of Schedule 7ac to the Taxation of Chargeable Gains Act 1992.

We have been asked to offer guidance on the meaning of certain statutory terms for the purposes of Capital Gains Tax taper relief and the new exemption for disposals by companies with substantial shareholdings. This article provides that guidance. The relevant legislation was enacted by Finance Act 2002. Words in italics in this article denote expressions that are defined in the legislation.

Introduction

Tax Bulletin 53 (June 2001) [TB53] included an article which explained the Inland Revenue's approach to interpreting the meaning of trading company and holding company of a trading group for the purposes of taper relief. Paragraphs 9 and 10 of Schedule 10 to Finance Act 2002 have revised the definitions of trading company and trading group for taper relief purposes for periods of ownership from 17 April 2002. There is also a new definition of holding company (see paragraph 4 of Schedule 10). Further, the qualifications for investment in a joint venture company as they affect the question as to whether a company or group was a trading company or trading group during a period have been relaxed (see paragraphs 11 and 12 of Schedule 10). The definitions described in TB 53 therefore now apply only for periods of ownership before 17 April 2002 even where the disposal takes place on or after that date.

Finance Act 2002 also introduced Schedule 7AC into the Taxation of Chargeable Gains Act [TCGA] 1992. This brings in an exemption regime for disposals by companies with substantial shareholdings [SSE]. The SSE legislation employs some of the same concepts as taper relief (e.g. trading company, trading group). Other definitions (e.g. trading subgroup) are relevant only to SSE.

This article considers further the meanings of these and other expressions in the light of the legislation introduced by Finance Act 2002 and, in particular, confirms that:

  • Although the definition of company for taper relief is not identical to that used for SSE and the definition of a group of companies for taper relief is different from that of a group for SSE, the definitions of trading company and trading group are essentially common to both regimes.
  • for taper relief, the changes to the wording of the definitions of trading company and trading group align the statute with existing practice. They are not intended to alter the substance of the original definitions, or to have different meanings before and on or after 17 April 2002.

Subject to the different meanings of company and group in the two regimes, the explanations in this article apply equally to both reliefs. They draw on the existing guidance in TB53, which continues to apply for taper relief in respect of periods of ownership before 17 April 2002. Because the essentials of the definitions of trading company and trading group for taper relief remain the same, much of what was said in TB53 is repeated here although the text has been updated to reflect the new wording of the legislation.

The legislation

Taper Relief: Shares as business assets and qualifying companies
Paragraph 4 of Schedule A1 TCGA 1992 sets out the conditions for shares to qualify as business assets and paragraph 6 of Schedule A1 (as amended by section 67 Finance Act 2000) sets out the rules for a company to be a qualifying company in relation to a person making a disposal of shares in a company. Where a company is a qualifying company in relation to that person the business assets rate of taper relief may be due wholly or in part on any chargeable gain arising on the disposal. The question as to whether a company is a qualifying company may also be relevant to persons who dispose of assets used for a trade carried on by a company.

Substantial shareholdings

The SSE legislation provides that from 1 April 2002 disposals of shares (or interests in shares or assets related to shares - as defined in paragraphs 29 and 30 of Schedule 7AC TCGA 1992) by companies with substantial shareholdings do not result in chargeable gains, or allowable losses, provided certain conditions are met. Two of these conditions are that, at certain times determined by reference to the date of the disposal in question

  • the company making the disposal is a member of a trading group or, if not a member of a group, is a trading company;
  • the shares are in a company that is itself a trading company, or the holding company of either a trading group or a trading subgroup.

Definitions and interpretations

Trading company

A trading company is "… a company carrying on trading activities whose activities do not include to a substantial extent activities other than trading activities" (paragraph 22A(1) of Schedule A1 TCGA 1992 and paragraph 20(1) of Schedule 7AC TCGA 1992).

Holding company, group and subgroup

For taper relief, paragraph 22(1) of Schedule A1 TCGA 1992 defines a group of companies as "… a company which has one or more 51% subsidiaries, together with those subsidiaries". For periods of ownership from 17 April 2002, paragraph 22(1) of Schedule A1 defines a holding company as "… a company that has one or more 51% subsidiaries". The previous definition, which applies for such periods prior to that date, makes it necessary to determine the extent of a company's business (excluding its own trade, if any) which consists of holding shares in its 51% subsidiaries. A company is a holding company at any time prior to 17 April 2002 when its business consists wholly or mainly of holding shares in its 51% subsidiaries. This test does not apply for periods of ownership from 17 April 2002. From that date, a company is a "holding company" at any time when it has a 51% subsidiary.

In the SSE regime a holding company is defined differently to encompass subgroups as well as groups. But holding companies are defined in essentially the same way for both taper and SSE purposes. Paragraph 26 of Schedule 7AC defines a group and membership of a group by reference to the normal capital gains group rules in section 170 TCGA 1992 except that references in section 170 to 75% subsidiaries are replaced by references to 51% subsidiaries. Paragraph 26 defines a subgroup as a collection of companies that would themselves form an SSE group but for the fact that one of them is a 51% subsidiary of another company. A holding company is then defined

  • for an SSE group, as the company described in section 170 TCGA 1992 as the principal company of the group, and
  • for a subgroup, as the company that would be the holding company of an SSE group but for the fact that it is a 51% subsidiary of another company.

The taper relief and SSE legislation define a 51% subsidiary by reference to the meaning given by section 838 of the Income and Corporation Taxes Act (ICTA) 1988 (see paragraph 22(1) of Schedule A1 TCGA 1992 for taper relief and paragraph 26(4) of Schedule 7AC TCGA 1992 for SSE). A company is a 51% subsidiary of another company for taper relief and SSE purposes if the second company owns directly or indirectly more than 50% of the ordinary share capital of the first company.

Ordinary share capital is defined for the purposes of the Tax Acts (which includes the provisions relating to corporation tax) in section 832(1) ICTA 1988 (this is applied for the purposes of Schedule A1 TCGA 1992 by paragraph 22(1) of that Schedule). The meaning is extended for the purposes of the definition of 51% subsidiary which applies for SSE purposes (but not for taper relief purposes) to include any share capital of a registered industrial and provident society (see paragraph 26(4) of Schedule 7AC TCGA 1992). Some companies do not have ordinary share capital (e.g. some Limited Liability Companies in the United States, see Tax Bulletin 51). Such companies cannot therefore be 51% subsidiaries of other companies.

Trading group and trading subgroup

Paragraph 22B(1) of Schedule A1 TCGA 1992, for taper relief, and paragraph 21 of Schedule 7AC TCGA 1992, for SSE, define what is a trading group in the same terms. The definition parallels that of a trading company so that a trading group is a group one or more of whose members carries on trading activities provided the activities of the group as a whole do not include, to a substantial extent, activities other than trading activities. The activities of the members of a group are treated as one business. Intra-group activities are disregarded for the purpose of determining whether the group is a trading group. So, for example, where one group company lets a property to another group company, the letting activity would be disregarded for this purpose. However, this netting off approach does not extend to transactions with joint venture companies that are not members of the group. So, letting property to such a joint venture company would count as an activity of the lessor.

In identifying companies whose shares might qualify for SSE exemption the concept of a trading subgroup is used to describe part of a group. It is defined in paragraph 22 of Schedule 7AC in the same way as a trading group, but with references to trading group changed to trading subgroup where appropriate. Intra-subgroup activities are disregarded in the same way as intra-group activities when determining whether a subgroup is a trading subgroup. However, intra-group activities between a member of the subgroup and another group company that is not in the subgroup are not disregarded in considering the status of the subgroup.

Trading activities

Paragraphs 22A and 22B of Schedule A1 TCGA 1992 and paragraphs 20, 21 and 22 of Schedule 7AC TCGA 1992 define trading activities. For a company/group/subgroup these are activities carried on by the company/a member of the group/subgroup

(a) in the course of, or for the purposes of, a trade being carried on by it/any member of the group/subgroup,

(b) for the purposes of a trade that it/any member of the group/subgroup is preparing to carry on,

(c) with a view to its/any member of the group/subgroup acquiring or starting to carry on a trade, or

(d) with a view to its/any member of the group/subgroup acquiring a significant interest in the share capital of another company that -

(i) is a trading company or the holding company of a trading group (or a trading subgroup in SSE), and

(ii) if the acquiring company is a member of a group, is not a member of that group.

However, activities within (c) and (d) count as trading activities only if the company/group member/subgroup member starts to carry on the trade, or acquires the shares, as soon as is reasonably practicable in the circumstances. For the purposes of (d) a significant interest is such an interest as

  • would make the company acquired a member of the same group/subgroup as the acquiring company, or
  • would result in the acquiring company having a qualifying shareholding in a joint venture company without making the two companies members of the same group (see paragraph 23 of Schedule A1 for taper relief and paragraph 24 of Schedule 7AC for SSE for definitions of qualifying shareholding and joint venture company).

The word 'activities' is not defined in the statute but in this context we interpret it to mean what a company does. Activities will therefore include engaging in trading operations, making and holding investments, planning, holding meetings and so forth. The legislation makes explicit that a company may have trading activities both when it is trading and before it commences to trade.

Trade

The following are trades for the purposes of taper relief and SSE:

  • anything that is a trade, profession or vocation within the meaning of the Income Tax Acts and is conducted on a commercial basis with a view to the realisation of profits (paragraph 22(1) of Schedule A1 TCGA 1992 and paragraph 27 of Schedule 7AC TCGA 1992), and
  • any Schedule A business (within the meaning of ICTA 1988) which consists in the commercial letting of holiday accommodation in the United Kingdom (section 241(3) TCGA 1992 as amended by paragraph 3 of Schedule 8 to Finance Act 2002).

We confirm that activities, such as farming, that are treated as a trade by section 53 ICTA 1988, are trades for the purposes of the Income Tax Acts.

In the course of, or for the purposes of, a trade

We accept that an activity is carried on in the course of, or for the purposes of, a trade if it is carried on in the process of conducting or preparing to carry on the trade. So, for example, where a company renegotiates an ongoing trading contract relating to its trade this will be an activity undertaken "in the course of" its trade. It will be clear in most cases whether an activity that a company undertakes is carried on in the course of, or for the purposes of, its trade or not. But similar transactions can be undertaken for different reasons depending on the facts.

For instance, a company may buy some land. If the company is a property developer and buys the land as trading stock, or a manufacturer and buys it to provide a site for a factory it intends to build to house its manufacturing process, the buying of the land would probably count as a trading activity. However, if a company buys the land so as to earn future rental income, or for potential capital growth, the buying of the land would not normally be a trading activity.

Normally, making an investment that yields investment income would not count as a trading activity. However, there are a number of circumstances where such activities could be undertaken in the course of, or for the purposes of, a company's trade.

An investment may be so closely related to the conduct of a trade that it effectively forms an integral part of the trade. For example, a travel agent may be required to keep a fixed level of cash on deposit for bonding requirements. Or a company might receive a large payment, perhaps from selling a shareholding or on the completion of a major contract, and earmark the funds for some particular trade purposes, such as to meet some demonstrable trading liability or expand the trade in the near future. The short-term lodgement of such surplus funds, for example in an interest-bearing deposit account or in bonds or equities, could count as a trading activity. Alternatively, the company may intend distributing the monies received to its members.

Depending on the facts, temporarily investing such funds until they can be distributed could count as being an activity undertaken for the purposes of the company's trade, since paying out the profits generated by a trade can count as a trading activity. This would be the case, for example, where the payment of an annual dividend depended on a meeting of the company's shareholders. Whether or not making and holding investments are part of a company's trading activities is a question of fact that can be determined only by reference to all the relevant circumstances.

Preparing to carry on a trade

The legislation specifically provides that trading activities include activities for the purposes of a trade that a company is preparing to carry on. This encompasses the situation where a particular trade is about to be started but the company has to carry out certain activities first. It also covers cases where an existing trade, which is currently being carried on by another person, will be acquired. The trading activities here may include one or more of: developing a business plan for carrying on the trade, acquiring premises, hiring staff, ordering materials and incurring pre-trading expenditure for the purposes of the trade to be carried on.

Acquiring or starting to carry on a trade, or acquiring shares in a trading company

Activities that a company undertakes with a view to acquiring or starting to carry on a trade, or acquiring a significant interest in the share capital of a trading company, may count as trading activities.
It is quite common for a company to dispose of its trade (or main trading subsidiary) and to invest (or put on deposit) the cash proceeds while it looks around to acquire a new trade or trading subsidiary. A company, group or subgroup temporarily in this position and actively seeking to acquire a new trade or trading subsidiary might still be a trading company, trading company or trading subgroup if it does not have substantial non-trading activities.

Trading activities here include assessing the potential viability of a trade which the company, group or subgroup is considering carrying on and other such activities even though they are not directly preparatory to the carrying on of the particular trade under consideration. So, a company, group or subgroup which has surplus cash that it intends to use to acquire a trade, or to start up one from scratch, which is actively evaluating a number of possible trades may be engaged in trading activities. However, such activities are trading activities only if an acquisition is made, or a new trade is commenced, as soon as is reasonably practicable in the circumstances.

As soon as is reasonably practicable in the circumstances

Rather than impose a fixed time limit, the legislation allows companies whatever time is reasonable, having regard to the particular circumstances, to prepare to carry on a new trade or to acquire a trade or trading company. What is reasonably practicable in the circumstances will depend on the facts in each case. For example, a company may be in negotiations to acquire a trading company but owing to circumstances beyond its control the purchase is delayed. There might be, for example, a problem with the vendor proving title to the company's assets. In such a case we would not suggest that the acquisition had not been made as soon as was reasonably practicable in the circumstances where this was the reason for the delay.

Substantial

Most companies groups and subgroups will have some activities that are not trading activities. The legislation provides that such companies and groups still count as trading if their activities "… do not include to a substantial extent activities other than trading activities". The phrase substantial extent is used in various parts of the TCGA 1992 to provide some flexibility in interpreting a provision without opening the door to widespread abuse. We consider that substantial in this context means more than 20%. The numerical tests in the SSE legislation for a shareholding to be a substantial shareholding refer to 10% or more, but this use of the word substantial is specifically applied only for the purpose of deciding whether a company holds a substantial shareholding in another company (paragraph 8(1) of Schedule 7AC TCGA 1992).
How should a company's non-trading activities be measured to assess whether they are substantial? Some or all of the following are among the measures that might be taken into account in reviewing a particular company's status.

Income from non-trading activities

For example, a company may have a trade but also let an investment property. If the company's receipts from the letting are substantial in comparison to its combined trading and letting receipts then, on this measure in isolation, the company would probably not be a trading company.

The asset base of the company

If the value of a company's non-trading assets is substantial in comparison with its total assets then again, on this measure, this could point towards it not being a trading company. If a company retains an asset it previously used, but no longer uses, for the purposes of its trade, this may not be a trading activity (but see below regarding surplus trading premises). In some cases it might be appropriate to take account of intangible assets (e.g. goodwill) that are not shown on a balance sheet in considering a company's assets. Current market value and amounts given by way of consideration for assets may both be appropriate measures of the relative extents of a company's trading and other activities. Which measure is appropriate will depend on the facts in each case.

Expenses incurred, or time spent, by officers and employees of the company in undertaking its activities.

For example, if a substantial proportion of the expenses of a company were to be incurred on non-trading activities then, on this measure, the company would not be a trading company. Or a company may devote a substantial amount of its staff resources, by time or costs incurred, to non-trading activities.
The company's history may be relevant. For example, at a particular instant certain receipts may be substantial compared to total receipts but, if looked at on a longer timescale, they may not be substantial compared to other receipts over that longer period. Looked at in this context, therefore, a company might be able to show that it was a trading company over a period, even where that period may have included particular points in time when, for example, non-trade receipts amounted to a substantial proportion of total receipts.

It may be that some indicators point in one direction and others the opposite way. We would weigh up the impact of each of the measures in the context of an individual case. If the Inspector was unable to agree the status of a particular company for a period then the issue could be established only as a question of fact before the Commissioners. However, we anticipate that such cases will be relatively rare.

Surplus trading property

We have been asked how property owned by a company and surplus to its immediate business requirements should be dealt with. Each case would need to be considered in light of the facts. We would not, for example, regard the following as necessarily indicating a non- trading activity:

  • letting part of the trading premises;
  • letting properties that are no longer required for the purpose of the trade in question, where the company's objective is to sell those properties;
  • subletting property where it would be impractical or uneconomic in terms of the trade to assign or surrender the lease. For example, the benefit derived from disposing of the lease may be outweighed by the reverse premium payable;
  • the acquisition of property (whether vacant or already let) where it can be shown that the intention is that it will be brought into use for trading activities.

Investments in joint venture companies

Where a company has a qualifying shareholding in a joint venture company (as defined in paragraph 23 of Schedule A1 TCGA 1992 for taper relief and in paragraph 24 of Schedule 7AC TCGA 1992 for SSE) then, provided the joint venture company is not in the same group as the company,

  • the holding of any shares or securities that the company holds in the joint venture company is disregarded, and
  • the company is treated as carrying on a proportion of the activities of the joint venture company equal to the proportion of that company's ordinary share capital it holds

in determining whether: (a) the company is a trading company, (b) a group that the company is a member of is a trading group, and (c) the company is the holding company of a trading group or trading subgroup.

Shares and other assets held otherwise than as investments

Companies may acquire shares or other assets for reasons other than investment. For example, companies may be paid in shares instead of cash as fees for services rendered or work carried out. Once such shares have been acquired the reasons for retaining them will need to be considered in order to determine whether or not their retention means that a company has non-trading activities. Among other issues, we should need to know the reasons why the shares were taken in settling a trade debt and whether they can reasonably be turned into cash or otherwise exchanged to meet trading requirements.
A company may have to hold shares in another company as a pre-requisite to trading (for example, companies may be expected to own shares in a trade organisation). In such cases we should want to know the reasons for holding such a share in order to determine whether the holding was a trading activity.

Corporate Venturing Scheme [CVS]

Investments in shares made under the CVS are investments like any others and the holding of such shares is unlikely to count as a trading activity in its own right. However, the CVS works in such a way that a company that qualifies for CVS investment relief is unlikely to have more than the 20% non-trading activity that would stop it being a trading company for taper relief and SSE purposes.

What to do if you want to know if a company is a trading company or the holding company of a trading group or subgroup

If you want to establish whether a company in which you held shares was a qualifying company for taper relief purposes while you owned the shares, our advice is that, in the first instance, you should seek advice from the company. The company will usually be able to tell you if its activities were such that it was a trading company (or the holding company of a trading group) so that it could have been a qualifying company so far as you were concerned.

Similarly, if a corporate shareholder planning to sell shares in a company wants some indication of whether that company is a trading company (or the holding company of a trading group or trading subgroup) for SSE purposes, it should ask the company concerned.

In either case, the responsibility for ascertaining the status of a company referred to in your tax return rests with you and you will need to take a view and make your return on this basis: you may wish, where applicable, to point out in the return that you made an unsuccessful approach to the company for confirmation of its status. Alternatively, the Inspector dealing with your returns may be able to provide a post-transaction ruling under the Code of Practice 10 procedures. For reasons of confidentiality the Inspector dealing with the company's tax affairs will not be able to correspond with you regarding its status.
A company may wish to establish its status for various reasons:

  • so that it can tell its non-corporate shareholders when it has been a trading company (or the holding company of a trading group) for taper relief purposes;
  • when it is planning to sell shares, the gain on the disposal may be exempted by the SSE legislation and it wants to know if it may qualify as a sole trading company (or a member of a trading group) for SSE purposes during the period specified in paragraph 18(1) of Schedule 7AC TCGA 1992;
  • when its corporate shareholders are planning to sell shares in the company and the gain on the disposal may be exempted by the SSE legislation, the shareholders may want to know if the company may qualify as a trading company (or the holding company of a trading group or trading subgroup) for SSE purpose during the period specified in paragraph 19(1) of Schedule 7AC.

In these circumstances Inspectors will, where there is uncertainty as to the company's status, respond to requests for their view in accordance with Code of Practice 10 and this article.

Any opinion that a company is or is not a trading company, a group is a trading group or a subgroup is a trading subgroup can relate only to the period under consideration. It is possible for a company, group or subgroup to change its status at any time, as its business or activities change.

Inspectors will usually be able to give a firm opinion on the status of a company for periods that have ended where all the relevant facts have been provided. Any view expressed which relates to a time for which facts are not yet available will be subject to revision. Future events may put a different perspective on the true nature of the activities of a company, group or subgroup during a previous period.

Because of the inherent difficulty in giving a view based on uncertain information, in some cases those involved may prefer to wait until all the relevant facts are known before approaching the Inspector.
So that the company's Inspector can form a view, the company should set out for its Inspector:

  • the reason why it is seeking the Inspector's opinion and the period over which the company wants the Inspector to consider its status;
  • all the facts that the company considers relevant in measuring the extent of its trading and its non trading activities and, where appropriate, the assumptions it has made in describing what it expects its activities to comprise over the part of the period falling after the latest point for which data is available;
  • why the company considers that there is uncertainty as to its status;
  • the company's conclusion as to its status, and why it considers, if applicable, that the measures that point in that direction outweigh those pointing in the opposite direction; and
  • (for SSE purposes) what disposal is being contemplated and when it is expected that the transaction will be completed.

The Inspector will offer his or her opinion whenever this is practicable and, if this differs from the company's view, explain the reasons for that difference.

Partnerships and loan relationships

FA 2002 inserted a new paragraph 19 into Schedule 9 FA 1996 to deal comprehensively with cases where a company is a member of a partnership and a money debt (which includes a loan relationship) is owed by or to the partnership. Each company partner computes separately loan relationship debits and credits arising on the money debt.

For this purpose paragraph 19(4) Schedule 9 deems that the money debt is owed by or to the company partner, and that everything done by the partnership in relation to the debt has been done by the company.
The company then computes the debits and credits ("the gross debits and credits") that arise from applying the loan relationships rules to this deemed situation. The company partner brings into account a proportion of these gross debits and credits, the proportion being determined by reference to the partner's interest in the partnership.

We have been asked whether paragraph 19(4) means that you effectively ignore the existence of the partnership. The question arises in two circumstances:

  • the company partner and the partnership have different accounting dates, or
  • the functional currency of the partnership differs from that of the company partner. For example, a company that prepares accounts in sterling may have an investment in a partnership that prepares financial statements in US dollars.

Our view is that paragraph 19(4) requires the company partner to imagine itself as "standing in the shoes" of the partnership. The company is not required to substitute its own accounting date, or its own functional currency, for that of the partnership.

Case law on deeming provisions shows that the application of a "statutory fiction" should be carried only so far as is necessary for the purposes of the statute. The purpose of the deeming exercise in paragraph 19(4) is to compute the debits or credits accruing to the company partner, in a way that takes account of the particular circumstances of that company. There is no need, in doing this, to pretend that the partnership does not exist at all.

Example 1 illustrates how a company partner's loan relationships debits and credits are calculated where its accounting date differs from that of the partnership. Example 2 illustrates the computation where the partnership has a different functional currency.

Example 1

X Ltd is a trading company with an accounting date of 31 December. It is a partner in a partnership P, which prepares accounts to 31 March. It does not account for its investment in P on a mark to market basis.

On 1 May 2003, the partnership acquires a zero coupon bond (issued by an unconnected company). The partnership accounts for the bond on an accruals basis. Its accounts show a credit of £50,000 in the year to 31 March 2004 in respect of accrued discount on the bond, and a similar credit of £80,000 in the year to 31 March 2005.

X Ltd is entitled to 50% of the profits of P in the year to 31 March 2004, but to only 25% in the year to 31 March 2005.

Step 1 - calculate gross credits

Under paragraph 19(4), the "gross credits" are computed as if the zero coupon bond were a creditor loan relationship to which X Ltd is a party for the purposes of its own trade. The company must account for this deemed loan relationship on an authorised accruals basis (paragraph 19(10)). X Ltd (and any other company partner) computes "gross credits" for periods of account ending on 31 March.

X Ltd therefore has gross trading loan relationship credits of £50,000 in the year to 31 March 2004, and £80,000 in the year to 31 March 2005.

The company is not required to work out the discount that would accrue on the bond in year ended 31 December 2003, or subsequent accounting periods.

Step 2 - compute the "appropriate share" of gross credits for each AP of X Ltd

Paragraph 19(6) says that apportionment of gross credits between partners is to be according to the shares that would be found by S114(2) ICTA88. Although paragraph 19(2) disapplies S114(1) ICTA88 where loan relationships are concerned, the apportionment rules in S114(2) continue to apply, including the provision for apportioning profits or losses to the corresponding accounting periods of the company.

X Ltd's apportioned credits are £25,000 (50% x £50,000) for the year to 31 March 2004, and £20,000 (25% x £80,000) for the year to 31 March 2005.

X Ltd will therefore need to time-apportion these sums between its own accounting periods, and bring in:

Year ended 31 December 2003: 275/366 x £25,000 = £18,784

Year ended 31 December 2004: (91/366 x £25,000) + (275/365 x £20,000) = £21,284

Example 2

Y plc is entitled to 40% of the profits of a partnership, Q. Y plc accounts in sterling; partnership Q accounts in dollars. Both Y plc and Q prepare accounts to 31 December. Y plc uses the closing rate/net investment method to translate its investment in the partnership, using an average exchange rate for the year to translate its share of Q's profit into sterling.

In the year to 31 December 2004, Q borrows $5 million from a bank. The bank is not connected with Y plc or any other company partner. Interest of $200,000 is payable on the loan during the period.
During the year the partnership sold goods to a customer for €10,000. The invoice remained unpaid at the year end. Q translated the trade debt into dollars at the year end, bringing into its accounts an exchange gain of $500.

Step 1 - calculate gross debits and credits

The gross debits and credits are calculated in the functional currency of the partnership. Paragraph 19(10) requires an authorised accruals basis to be used. Thus there is a debit of $200,000 in respect of the loan interest. S100(1) and (2) FA96 also requires exchange differences on the Euro trade debt (which is a money debt, but not a loan relationship) to be accounted for under the loan relationships rules. This gives rise to a gross credit of $500.

Step 2 - apportion gross debits and credits to the company partner

Since Y plc is entitled to 40% of partnership profits, it must bring into account a debit of $80,000 and a credit of $200 (or a net amount of $79,800). In accordance with S94AB(1) and (2) FA93, this is translated into sterling at the rate used in Y plc's accounts to translate the partnership profits. If the average rate used is, say, $1.6/£, Y plc would show a loan relationship debit of £49,875 (79,800 divided by 1.6) in its tax computations.

Similar principles apply where a partnership is a party to a derivative contract (paragraph 49 Sch 26 FA 2002).

Miscellaneous

Certificates Of UK Residence For Companies

1. This article explains the circumstances in which the Inland Revenue will certify that a company is a resident of the United Kingdom for the purpose of double taxation agreements (DTAs) entered into by the UK. It does not consider the position of individuals.

Residence as a condition in DTAs for obtaining relief from tax

2. The relevant DTA should always be considered in a particular case. But the following is the general pattern under the UK's DTAs.

3. A company may claim relief from another State's tax under the DTA between the UK and that State only if it meets one or more conditions. The first is that the company is "a resident of the UK" for the purpose of the DTA in question.

4. Under Article 4(1) of a typical DTA a company will be a resident of the UK if, under the laws of the UK, it is liable to tax in the UK by reason of its domicile, residence, place of management, place of incorporation or any other criterion of a similar nature.

5. A company that is incorporated in the UK is resident here under domestic law (Section 66 FA 1988) unless

o it migrated with Treasury consent before 15 March 1988, continues to carry on a business and is centrally managed and controlled outside the UK; or

o it is treated as not resident in the UK by virtue of Section 249 FA 1994 (under which a company is treated as non-resident if it is so treated for the purposes of a DTA - see paragraphs 22-24 below).

6. Being a resident of the UK may be the only general condition for claiming relief from the tax of another State, eg if the company has manufacturing or retailing profits and it does not have in the other State a permanent establishment, as defined in the DTA, to which the profits are attributable.

7. But if the company derives dividends, interest or royalties from the other State, then another condition will usually have to be met. This is that the company is either the beneficial owner of the income in question, or is subject to tax in the UK in respect of the income. Some DTAs have both tests.

Examining claims under DTAs

8. The Inland Revenue can be expected to take reasonable steps to support companies that are residents of the UK in their legitimate claims to relief from the tax of another State with which the UK has entered into a DTA; just as companies that are residents of the other State will expect the tax authorities of that State to support them in their legitimate claims to relief from UK tax under the DTA.

9. If a UK company claims relief from the tax of another State under the DTA between the UK and that State, the other State will verify that the conditions for relief are met and will ask appropriate questions if the position is not immediately clear.

10. However, the Inland Revenue must take reasonable precautions against statements made by it being used to obtain relief from another State's tax if that relief is not due. It is important that we do not jeopardise our relations with other States. We have a responsibility to the generality of UK taxpayers to maintain the UK's reputation in this area.

11. We will therefore, as necessary, ask a company for information that we need to verify the accuracy of statements that we are asked to make in support of its claim to relief from another State's tax under a DTA. And we will not support a claim to relief where we have information which shows that the claim may not be valid.

12. For example, having regard to paragraphs 6 and 7 above, a residence certificate will not be given if the profits or income in question are not profits or income of the UK company concerned. This will be the case if, for example, it acts as an agent for another person rather than as principal. We have also seen cases where a UK company has lent its name to a transaction when the beneficial owner of the profits or income resulting from that transaction is a different person.

13. It would be wrong for us to certify the residence status of a UK-incorporated company if the certificate is likely to be used to support a claim to relief from another State's tax in such circumstances, since the proper person to claim such relief is the person who is the beneficial owner of the income. This would be the case even if the UK company was rewarded by the other person, for example by a payment of commission or for the use of its name, since this would not be the income that was the subject of the claim under the DTA. It would also be wrong to certify UK residence if we have insufficient information to form a view on whether the profits or income concerned are profits or income of the UK company or not.

Certifying that a company is UK resident

14. If we are asked to certify that a company is UK resident, we will need to know the use to which such a certificate will be put before providing it.

15. For example, if a company requires a letter simply confirming that it is registered with the Inland Revenue in order to be allowed to do business in another State, the person dealing with the company's affairs can provide a letter stating that they are dealt with in his or her office. Such a letter should make it clear that it is not a certificate of UK residence, since this is not relevant to the company's request.

16. However, a company might want to use a certificate of UK residence in order to claim relief, under the DTA between the UK and another State, from tax that would otherwise be payable in that State.

17. The person dealing with the company's affairs will normally first check the Double Taxation Relief Manual to see if the other State has provided a form for claiming relief from its tax on the income in question. This may be the case especially with dividends, interest and royalties.

18. If the Manual indicates that such a form exists, the company must make its claim using it and, as appropriate, ask the Inland Revenue to certify its residence status on the form. The other State will have designed the form with the intention that it should be used in relation to the types of income in question, and we will not undermine its administrative procedures by providing a letter certifying UK residence instead.

19. But if the other State does not provide a form for use in the circumstances of the case, the company might ask for a letter certifying that the company is a resident of the UK for the purposes of the DTA.

20. In either situation, for the reasons given in paragraphs 10-13 we must be sure that the Inland Revenue does not support a claim to relief that could not be justified. A company requesting a letter certifying UK residence should provide details of the nature of the proposed transaction and the income concerned. If they are not provided, we will normally ask for them. We will also check the relevant DTA to make sure that there is no obvious reason why the company could not claim the relief. We will not certify UK residence if we think that to do so could mislead the other State into thinking that the Inland Revenue believes that the relief is due if this is not the case.

21. It should usually, for example in the case of established companies whose tax affairs are well known to us, be possible to certify that a UK-incorporated company that is clearly the beneficial owner of the income that is the subject of the claim under the DTA (and/or, depending on the terms of the DTA, is subject to tax in the UK in respect of the income) is a resident of the UK for the purpose of claiming relief under the DTA in respect of that income.

22. However, it should not be overlooked that the company, even though UK-incorporated, could also be resident in another State under that State's domestic law. Such a company would then be dually resident. If there is a DTA between the UK and the other State it may contain a tie-breaker test, stating typically that a company that is a resident of both States under their respective domestic laws shall, for the purposes of the DTA between them, be deemed to be a resident only of the State in which its place of effective management is situated. Where this is situated is a question of fact.

23. If the company's place of effective management is in the other State, it would not then be regarded as a resident of the UK for the purposes of the DTA between the UK and that State. And (except for the purposes of the controlled foreign company rules in certain situations - Section 747(1B) ICTA 1988, inserted by FA 2002) under Section 249 FA 1994 the company would not be regarded as resident in the UK under domestic law either. Consequently it would not be a resident of the UK for the purposes of any other DTA that the UK has entered into.

24. The lack, or limited extent, of presence or activities in the UK might be an indication that the company is effectively managed outside the UK, and that it is therefore a dual resident company, with the consequences described above. If a UK-incorporated company does not seem to have much or any presence or activities in the UK, we will not certify that the company is a resident of the UK for the purposes of domestic law or of a DTA if we

  • have reasonable grounds for believing that the company may be effectively managed in, and hence may be resident in, a State other than the UK with which the UK has a DTA with a tie-breaker test for dual resident companies; or
  • have insufficient information to make a decision one way or the other.

25. With regard to the first of those points, the residence status of the company's directors (including shadow directors) and the ultimate beneficial shareholders may be a matter about which we properly seek information in this connection.

26. A company seeking a certificate of UK residence should, however, be able to provide sufficient information to show where it is effectively managed if we ask about the point. Revenue Policy, International (Company Residence) can, if required, provide advice and guidance in applying the established facts in particular cases to the tie-breaker wording in any DTA.

27. With regard to the second of the points in paragraph 24, all we can reasonably certify is that the company is incorporated in the UK but that we are unable to confirm its residence status for purposes of DTAs concluded by the UK.

Exchange of information

28. If the person dealing with a company's affairs has information about its connections with, or business dealings in, another State that he or she thinks may be of interest to that State, he or she will arrange for that information to be sent to the other State using the prescribed competent authority procedures, according to the terms of the exchange of information Article in the UK's DTA with that State or, where appropriate, under the EC Mutual Assistance Directive (paragraphs 350 onwards of the Double Taxation Relief Manual). Information will be sent spontaneously as well as at the request of the other State. This will include cases where a certificate of residence has been provided and it is subsequently claimed, or it becomes clear, that the transaction in respect of which it was given did not take place.

Important changes to National Insurance contributions (NICs) from 6 April 2003
From 6 April 2003.

Employee NICs are due:

  • at 11 per cent (or the appropriate contracted out rate) on earnings from the Primary Threshold to the Upper Earnings Limit and
  • at 1 per cent on all earnings that exceed the Upper Earnings Limit

Employer NICs are due at 12.8 per cent (or appropriate contracted-out rate up to UEL) on all earnings above the secondary threshold.

Self-employed Class 4 NICs are due at 8 per cent on profits or gains between the Lower Profits Limit and the Upper Profits Limit and at 1 per cent above the upper limit.

The introduction of the new structure means that the calculation of the annual maximum will change (regulations will be published shortly). This has implications for deferment cases. In general people who are presently able to defer payment of NICs will continue to do so. However, they will pay NICs at 1 per cent on all earnings or profits/gains above the Primary Threshold/Lower Profits Limit for employments/self-employment where deferment has been allowed.

(No longer relevant)
Corporation Tax on Chargeable Gains: Indexation Allowance: Error in Internet tables

Companies and other bodies within the charge to corporation tax are able to apply an indexation allowance to allowable expenditure when computing their chargeable gains. (For gains chargeable to capital gains tax, indexation was frozen in April 1998 when taper relief came into effect.) Each month we publish tables on the internet showing the allowances relating to disposals in the previous month, depending on the date of expenditure. The tables appear on our website at www.inlandrevenue.gov.uk/rates/cgt.htm.

There was an error in some of the tables we published earlier this year. We regret that some of the figures were wrong and apologise for any inconvenience this may have caused. The error affects only the indexation allowance computed for assets disposed of between 1 February and 31 July 2002 (inclusive). We have since corrected the figures in the internet tables.

We are identifying cases where taxpayers had already submitted tax returns using these wrong figures; we will then contact those taxpayers. Companies which before 21 September 2002 (the first full day on which the correct figures were shown) took indexation factors from our website for February to July 2002 are asked to replace them with the correct figures.

Who is affected?

Any company (or other body within the charge to corporation tax on chargeable gains) that has

- already computed a chargeable gain on a disposal of assets occurring between 1 February 2002 and 31 July 2002 (inclusive), and

- used the figures in the indexation tables published on our website before 21 September 2002,

is potentially affected, dependent upon when expenditure on the asset was incurred.

Individuals, trustees and personal representatives of the deceased are not affected.

What is the error?

Some indexation factors on our tables have been shown as "Nil" when there should have been a positive indexation factor. So chargeable gains calculated using the information were larger than if the correct figures had been used.

The Retail Prices Index (RPI) figure shown at the top of each month's table was correct.

What computations are affected?

The computations of chargeable gains which may have been affected are those:

- relating to asset disposals taking place in the period between 1 February 2002 and 31 July 2002 (inclusive), and

- requiring a computation of indexation allowance on expenditure incurred in the period between 1 May 2001 and 31 December 2001 (inclusive).

To check on the exact months of expenditure affected please see the summary table below. There is also a set of "nil" entries that remains correct.

Summary Table

The revised entries are set out aside. In each case the original incorrect tables showed the indexation factor to be 'Nil'. If a cell is blank, then the original figure is still right.

Expenditure in 2001   Disposals in 2002
February March April May June

July

May

  0.002 0.009 0.011 0.011

0.010

June

  0.001 0.007 0.010 0.010

0.009

July

         

 

August

  0.003 0.010 0.013 0.013

0.011

September     0.006 0.009 0.009 0.007
October   0.001 0.008 0.011 0.011 0.009
November 0.001 0.005 0.012 0.015 0.015 0.013

December

0.002 0.006 0.013 0.016 0.016

0.014

Valid 'Nil' entries

The Nil entries in the table below were correctly reported as "Nil" or zero in the original tables.

Expenditure in 2001

Disposals in 2002

Jan Feb March April May June

July

May Nil Nil          
June Nil Nil          
July Nil            
August Nil Nil          
September Nil Nil Nil        
October Nil Nil          

November

Nil          

 

December

Nil          

 

 

Expenditure in 2002

           

 

January

           

 

February

           

 

March

           

 

April

           

 

May           Nil Nil
June             Nil

Are the published figures now right?

We corrected the error and published revised tables on our website during the afternoon of 20 September 2002.

What is the Inland Revenue doing to ensure taxpayers do not lose out?

Companies which have already submitted a tax return

We will identify tax returns that have been submitted that include a disposal where the indexation allowance has been calculated using an erroneous indexation factor.
We will write to the company (or its agent) to let it know.
We will ask it to write back with an amended figure.

Companies which have yet to submit a tax return

When we check returns received in the future we will look out for cases where indexation allowance was calculated using an erroneous indexation factor.

What should I do?

Companies which have already submitted a tax return

You do not have to do anything to find error cases. We will write to you if we find that a tax return contains a calculation based on an erroneous indexation factor.

If you believe you have made a tax return using an erroneous indexation factor, and you have not heard from us by the end of December 2002, please contact your tax office.

If you prefer, you can write to your tax office now with the replacement calculation if you know that you have used an erroneous indexation factor.

Companies which have yet to submit a tax return

Please ensure that you use the revised indexation tables that are now on our website if you have made disposals in the period February to July 2002.

What should I do if I did not realise in time that this affected my company?

If you have not discovered the error within the normal window for amending returns, you can make a claim for 'error or mistake relief'. Your tax office will advise you on how you should proceed.

How did this error happen?

Under section 54 of the Taxation of Chargeable Gains Act 1992, no indexation factor is applied if it is less than zero.

So when the movement in the retail prices index was negative, we over-rode the formula for calculating the indexation factor and showed the word 'Nil' instead.

When we updated the spreadsheet for the following month's figures we did not work out the indexation factor for cells where the factor had been nil in the preceding month.

Will it happen again?

We have changed the spreadsheet used to create the tables each month. Now the formula is not over-ridden and 'Nil' entries are generated automatically.

We have also re-written the operating instructions that accompany the spreadsheet.

Where can I get more information?

Please contact your tax office for help in your particular case.

no longer current-due to deletion of article in TB 46Update to article in TB46

"Information Powers and Legal Advice"

The article in TB46 "Information Powers and Legal Advice" explained our view on the question of claims to professional or legal privilege which are sometimes made in response to requests for information.

The article explained our practice, based on our understanding of the law, with regard to the circumstances in which production to the inspector of documentation for the purpose of seeking and giving legal advice on tax matters may be sought under the information powers in Sections 19A and 20 Taxes Management Act 1970 and Paragraph 27, Schedule 18 Finance Act 1998. The article covered all such legal advice whether or not it is given by lawyers.

The article took account of the Special Commissioners decision in An Applicant and An Inspector of Taxes (SpC 189) that there is no automatic exclusion from the scope of Section 20(1)(a) for documents subject to legal professional privilege, which was subsequently confirmed by the Divisional Court and the Court of Appeal in R v Special Commissioner, ex parte Morgan Grenfell & Co Ltd.

The decision of the lower courts was overturned by the House of Lords on 16 May 2002. The House of Lords held that documents subject to the legal professional privilege of the person under enquiry are excluded from the scope of Section 20(1)(a).

We accept that the same reasoning applies to all the information powers in Sections 19A and 20 Taxes Management Act 1970 and Paragraph 27, Schedule 18 Finance Act 1998.

The article in TB46 must therefore be read subject to the proviso that documents subject to the legal professional privilege of the person under enquiry are excluded from the scope of these information powers.
Inland Revenue Statements of Practice and Extra-Statutory Concessions issued between 1 October 2002 and 30 November 2002

Extra Statutory Concessions

There have been no Extra Statutory Concessions for this period

Statements of Practice
Number Title Date
SP5/2002 Exemptions for companies gains on substantial shareholdings
- sole or main benefit test
- Paragraph 5 Sch 7AC Taxation of Chargable Gains Act 1992
29/10/02

You can get copies of SPs and ESCs by telephoning 020 7438 4266.

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 issued 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.
  • 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, Mr Shell Makwana, Room G7, New Wing, Somerset House, Strand, London, WC2R 1LB or e-mail Shell.Makwana@ir.gsi.gov.uk. 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

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