INTRODUCTION
When they were originally mooted, Pre-Budget Reports were thought to be the power houses by which a Chancellor of the Exchequer would make significant tax changes that would often be refined or finally introduced in a Spring Budget. In fact, if 2006 is anything to go by the December statements are far more geared to macro economic issues than tax measures.
This time around, there are various announcements with regard to allowances and benefits, some changes to duties to promote greener attitudes and finally, a press notice entitled “Ensuring Fairness For All Taxpayers”. Those who are used to The Chancellor’s sense of humour will immediately have understood that this final document is the one that will contain the nasties with attacks on various types of tax avoidance.
General Measures:
Controlled Foreign Companies (CFC) and Foreign Profits
Reform of Insurance Tax
Stamp Duty on Shares
Stamp Duty Land Tax
Construction Industry Scheme
Reform of EU Travellers’ Allowances
Income Tax Rates and Allowances
Fuel Duty Rates
Passenger Duty Rates
Child and Working Tax Credit Rates and Child Benefit
Anti-Avoidance (or Ensuring Fairness For All Taxpayers):
Managed Service Company Schemes
6 Year Limitation Period for Direct Tax Claims
VAT- Partial Exemption “Special Method”
Pensions Taxation
Disclosure Regime – Tackling Non-Compliance
Targeted Anti-Avoidance Rules for Capital Losses
Taxation of Companies – Closure of Avoidance Schemes
Fraud
GENERAL MEASURES
Controlled Foreign Companies (CFC) and Foreign Profits Following the recent European Court of Justice decision in the case of Cadbury Schweppes, changes are to be made to CFC rules to ensure that they remain effective. These changes will relax the UK CFC rules by enabling UK companies to apply to HMRC to disregard certain profits of their CFCs where they arise from genuine economic activity and business establishments in other European Union member states or certain other states in the European Economic Area.
In addition, one highly artificial avoidance scheme is to be closed off. These changes will take effect from the date of the report, 6 December 2006.
Reform of Insurance Tax The government is introducing a package of measures which will simplify the rules governing life assurance companies.
Stamp Duty on Shares The Stamp Duty Reserve Tax exemption is to be extended to cover the purchase of overseas Exchanged Traded Funds.
Stamp Duty Land Tax Ever since it was introduced, professionals have been looking for ways to avoid Stamp Duty Land Tax. It is therefore not surprising that the Chancellor has introduced two new anti-avoidance measures. Each of these will take effect from the date of the report, 6 December 2006. There are also transitional provisions.
The first change relates to situations where there is a scheme involving a series of transactions and the total Stamp Duty Land Tax due is lower than it would have been had there been a single transaction. In these circumstances, following principles that already apply for direct taxes, the scheme transactions are disregarded and there is a notional land transaction on which the duty is based, ensuring that no Stamp Duty Land Tax is lost.
The second change deals with transfers in and out of partnerships and transfers of partnership interest. These are relatively complex and those who might be involved are advised to take advice from members of our Professionals Group.
Construction Industry Scheme The Chancellor had previously announced that he was introducing a new scheme in connection with sub-contractors in the Construction Industry that will commence in April 2007. He has now confirmed that this is to go ahead.
Reform of EU Travellers’ Allowances It is very pleasing to be able to report that the decision by EU member states to double the tax free allowance for international travellers returning from trips outside the EU is to be implemented by the UK.
This means that the previous limit of £145 has increased to £290. With the very strong pound at the moment, travellers to countries such as the United States will be able to bring back significantly more goods than has been the case in the recent past. In addition, The Chancellor has announced the package of measures to combat avoidance in this area.
Income Tax Rates and Allowances The rates of income tax and personal allowances are now announced at the time of the Pre-Budget Report rather than only a few weeks before the start of the relevant period.
The personal allowance will increase to £5,225 (previously £5,035), the age-related personal allowances will rise to £7,550 (£7,280) for people aged between 65 and 74 and to £7,690 (£7,420) for those aged 75 or over. This means that in 2007/08 no one aged 65 or over will pay tax on an income of up to £145 per week.
National Insurance rates remain unchanged and the thresholds and limits move such that the Lower Earnings Limit will go up to £87 per week the Upper Earnings Limit to £670 per week and the primary and secondary thresholds to £100 per week. Similar rises will apply for Class 4 purposes while the Class 2 weekly rate increases by 10p to £2.20 per week and the voluntary Class 3 rate by 25p to £7.80 per week.
Fuel Duty Rates There is to be an across the board rise of 1.25p per litre to all of the main fuel duty rates. This takes effect from 7 December 2006.
Passenger Duty Rates In perhaps the worst protected secret of this Pre-Budget Report, the rates for air passenger duty are to increase from 1 February 2007 by 100% in all cases. This means that passengers flying to EEA destinations and certain other European countries will pay £10 in the lowest class of travel and £20 in every other class. The equivalent figures for passengers flying to other destinations increase to £40 in the lowest class for travel and £80 for those who prefer greater comfort.
Child and Working Tax Credit Rates and Child Benefit The child benefit rises in line with inflation whereas the child tax credit increases in line with average earnings. However, the family element (normal and baby addition) is frozen this year.
ANTI-AVOIDANCE (OR ENSURING FAIRNESS FOR ALL TAXPAYERS)
Managed Service Company Schemes
When the legislation under IR35 was introduced in connection with personal service companies, a new type of company known as a composite company was created. These were designed to act as umbrella organisations to enable groups of individuals to team up and get around the new rules.
Now, in an attempt to promote fairness the government is taking action to tackle Managed Service Company Schemes that are used to avoid paying employed levels of income tax and National Insurance Contributions. A 65-page consultation document has been published to coincide with the Pre-Budget Report with the intention of introducing legislation in Finance Act 2007 taking effect from 6 April 2007.
The consultation document can be downloaded from HM Revenue & Customs’ website and any comments must be submitted by 2 March 2007.
6 Year Limitation Period for Direct Tax Claims
There have been technical issues with regard to the periods over which people can make claims where direct tax has been paid erroneously under a mistake of law. In future, a firm rule is to be established whereby there will be a limit of 6 years from the date of payment in all cases.
VAT- Partial Exemption “Special Method”
Changes are to be made to the VAT partial exemption regime commencing from 1 April 2007. From that date onwards, businesses will have to declare the suitability of any proposed “special method” for the calculation of VAT before it is approved by HMRC. The government believes this will greatly speed up the approvals process.
Pensions Taxation
There are to be minor changes to the operation of pensions taxation. In particular, the government is to tighten up the rules on Alternatively Secured Pensions.
Disclosure Regime – Tackling Non-Compliance
The 2004 Budget introduced a disclosure regime in an attempt to counteract tax-avoidance schemes. In order to increase their powers, the government is consulting on better means of investigating schemes where there are reasonable grounds to believe that a promoter has failed to comply with statutory disclosure obligations.
Targeted Anti-Avoidance Rules for Capital Losses
As part of a continuing raft of measures to prevent contrived tax schemes, a number of loopholes will be closed with effect from 6 December 2006. This is targeted at situations where a tax advantage could be derived from the use of contrived capital losses by individuals, trustees or personal representatives. In future, allowable capital losses will be restricted to those arising from genuine commercial transactions. The cynical might question why this was not always the case.
Taxation of Companies – Closure of Avoidance Schemes
Once again with effect from the date of the Pre-Budget Report, 6 December 2006, more artificial schemes brought to light under the disclosure regulations are to be outlawed. These include schemes relating to manufactured payments, exchange gains and losses, annual payments, double taxation relief, lease and lease back and controlled foreign companies.
Fraud
Finally, the government has announced that it is to strengthen its strategy for tackling missing trader intra-community VAT fraud, more commonly known as Carousel Fraud.
They have increased the number of staff deployed to investigate frauds of this type and in particular will be focusing on:
- Identifying and prosecuting the criminals behind the fraud;
- Working internationally to combat cross-border fraud;
- Identifying and tracking those goods more susceptible to such frauds;
- More in-depth checking of suspect repayment claims.
