By George Bull, Head of Tax and Professional Practices, Baker Tilly
With rows over university funding dominating the headlines, the casual observer might be forgiven for thinking that there was little else going on in the world of Westminster; but today also saw the arrival of an early Christmas present from the Treasury in the form of 532 pages of draft legislation for potential inclusion in Finance Bill 2011.
The Government has carried out extensive consultation asking taxpayers what they want in this Christmas present, so there have been many confident predictions as to what would be under the shiny wrapping paper. But did we get what we asked for...
Something for when you retire
The most heavily trailed changes for which draft legislation has been published are to the rules governing pensions.
• The existing effective obligation for members of a defined contribution pension scheme to purchase an annuity by age 75 is to be abolished, creating an increased flexibility that is likely to be welcomed.
• In order to ensure that increased flexibility doesn’t lead to pension funds being exhausted with the recipients being forced to fall back on support from the state, the draft legislation also introduces a limit on direct draw downs set at 100% of the equivalent annuity in most cases. To exceed this limit, individuals will need to demonstrate lifetime pension income of at least £20,000 per year.
Something for the holidays
A special tax regime for furnished holiday lettings (“FHLs”) currently provides more favourable tax treatment than would otherwise be available, but has been found to be incompatible with European law. After surviving a threat from the previous government to simply abolish the regime altogether, the regime is now to be made compatible with EU requirements by expanding it to apply to properties in both the European Economic Area and the UK. At the same time, however, the minimum letting periods for properties to qualify are being increased. The government has gone some way to address the potential problems for businesses which fail to meet the minimum letting requirements by providing a period of grace, but the possibility of additional uncertainty and complexity for taxpayers who move in and out of the regime will remain.
Something for the family
Existing anti-avoidance legislation operates to restrict the use of the lower rate of corporation tax for small companies in cases where the taxpaying company has “associated companies”. The rules are widely drafted so that an individual’s company will often be regarded as associated with any companies owned by other members of their immediate family, increasing the applicable rate of tax. Changes included in today’s draft legislation are designed to relax the rules so as to only catch situations where substantial commercial interdependence exists.
Something for the relatives
Companies with operations overseas will welcome the draft legislation setting out interim measures as part of the Government’s ongoing project to reform the taxation of foreign profits. The changes currently proposed widen the exemptions from the controlled foreign company (“CFC”) regime and provide a permanent “opt-in” exemption from UK tax on the profits of a company’s overseas branches.
Consultation to simplify the taxation of companies’ chargeable gains has been going on for several years; today’s draft legislation sets out the proposed changes. These include:
• Simplification of the highly complex rules governing the use of capital losses in situations where the ownership of a company changes. In particular, certain restrictions on the use of losses realised after the change in ownership are to be removed.
• Simplification of the “value shifting” rules in an attempt to restrict their application to cases of genuine avoidance.
• Simplification of the “degrouping charge” rules so as to reduce the number of cases in which a sale of shares in a company which is itself tax free by virtue of the substantial shareholding exemption (“SSE”) nonetheless crystallises a tax liability in the form of a degrouping charge.
Something not so simple
At the same time as introducing the simplification measures described above, the Government is also bringing forward new targeted anti-avoidance provisions in other areas of corporation tax to target cases of perceived abuse, particularly in relation to financial instruments.
Plans to introduce a general anti-avoidance rule (“GAAR”) were met with some hesitancy when they were announced earlier in the year. A detailed study programme has now been put in place, led by Graham Aaronson QC, to establish whether a GAAR could be formulated in a way that meets the concerns of both Government and business. This study should be completed by 31 October 2011.
Something for the House
Following the recent reform of MPs’ expenses, today sees the first announcement of new legislation designed to ensure that accommodation expenses paid to MPs under the new more restrictive regime continue to be exempt from tax.
The draft legislation proposes new rates of duty applying to high-strength (7.5% abv and above) and low-strength (2.8% abv and below) beers as part of the Government’s drive to discourage consumption of higher strength products.
And a charity Christmas card
The complex anti-avoidance rules applying to transactions between charities and “substantial donors” have come in for much criticism since their introduction in 2006. Today’s draft legislation replaces these rules with what is intended to be a simpler and more targeted provision, catching only situations where a donation has been made with a main purpose of obtaining a benefit from the charity.
But I got that last year!
Much of the draft legislation published today is in fact taken up with enacting changes already announced in the Emergency Budget earlier this year. Highlights include:
• Reductions in the main rate of corporation tax to 27% from 1 April 2012 and in the small companies’ rate to 20% from 1 April 2011. (A reduction in the main rate to 27% from 1 April 2011 has already been legislated for.)
• Capital allowances changes with a reduction in the Annual Investment Allowance (“AIA”) from £100,000 to £25,000 and a reduction in the rate of writing down allowances (“WDAs”) from 20% to 18%, both changes taking effect from 1 April 2012.
• Changes to tax treatment of employer-supported childcare schemes to, in particular, restrict tax relief to the basic rate.