The Finance Bill for 2013 was published on 11 December and comprised of over a thousand pages. Much of the proposed legislation is a product of consultations undertaken over the last 12-24 months and the Bill is open for further consultation until 6 February 2013.
The most significant features are the introduction of the GAAR and the statutory residence test. Both have been under discussion for some time and potentially will have a significant impact. While useful to know the parameters of the legislation, it is only with time that taxpayers will know how these provisions will work in practice. In this summary we outline below the main features that will be of interest to our industry.
Statutory residence test and ordinary residence
The statutory residence test comes into force from 1 April 2013 aiming to remove the uncertainties inherent in the current residence rules based primarily on case law with a clear statutory test.
The test will be divided into three parts, such that an individual will be deemed to be either automatically non resident or automatically resident based on upper and lower day count tests or in the mid range, residency will be determined based on a combination of the amount of time spent in the UK with the number of ties the person has with the UK. Key ties include family, accommodation and economic interests in the UK. Although it has not been determined how and whether any additional individuals will become resident as a result of this test, those who do will have an increased self assessment burden and will be subject to tax on their worldwide income.
The concept of ordinary residence will be eliminated with an aim to simplify the residency rules. This will impact various tax provisions such as the remittance basis, capital gains tax and transfer of assets abroad provisions which in places operate off the concept of ordinary residence.
The long anticipated general anti abuse rule (GAAR) takes another step closer to implementation with the release of slightly revised draft legislation, guidance and much more practical detail on the proposed operation and framework of the new regime. Additional tweaks to the detail confirm that the GAAR is designed to tackle only arrangements which involve ‘contrived’ or ‘abnormal steps’, so should not in theory impact legitimate planning with a strong commercial basis. It was announced that the new legislation will take force from the date of Royal Assent of the Finance Bill 2013 and should not impact arrangements made before that point.
Attribution of gains & transfer of assets abroad
Responses to the consultations on amendments to TCGA 1992 s13 and the transfer of assets abroad provisions which closed on 22 October were released with updated draft legislation. Both sets of legislation were subject to EU infringement proceedings which forced the Government into action; however it is still not clear whether the changes will be regarded as sufficient. Interested parties will be following the progress of the case referred to the ECJ shortly after the consultation closed.
With regard to the changes to s13, as well as amendments previously proposed, we now have more clarity on the definition of economically significant activities and the de minimus limit has been increased from 10% to 25% for participators. Both are very welcome changes and will take effect retrospectively from 6 April 2012.
The transfer of assets abroad legislation potentially applies to individuals who are considered to be avoiding tax by using offshore structures to shelter income. As part of the response to the EU infringement proceedings, the Government has introduced a new exemption. The new exemption will have a retrospective effect from 6 April 2012 and apply to transactions where the EU treaty freedoms are infringed and which meet certain conditions.
Other proposed changes aim to clarify how certain aspects of legislation operate, such as matching of an individual’s benefits received with the ‘relevant income’ arising to the person abroad (when an individual other than the transferor is the chargeable person), the interaction of the provisions with other tax legislation and double taxation agreements.
Corporate tax rates, capital allowances and IR35
The main rate of corporation tax is set to be cut to 21% from 1 April 2014, more closely aligning the small profits rate with the main rate of corporation tax. This equates to a further 2% reduction from 23% which comes into effect on 1 April 2013. The annual investment allowance for a business will be increased substantially from £25,000 to £250,000 on any qualifying plant and machinery expenditure purchased within a two year period starting on 1 January 2013.
The scope of the intermediary legislation, better known as IR35, is to be expanded to include office holders. Under the new proposals, senior individuals who have an influence in the strategy of a business will also be caught, where the provisions apply.
UK/Swiss tax cooperation agreement
The UK/Swiss tax cooperation agreement will become law on 1 January 2013. Under the legislation due to come into effect, remittances to the UK to pay UK tax due on untaxed amounts are treated as a taxable remittance for UK resident, non-UK domiciled individuals taxed on a remittance basis. The proposed revisions seek to make this position more equitable, by not treating the payment of UK tax due as a taxable remittance.
Income tax will be charged on returns from arrangements that produce sums “economically equivalent to interest”. The changes to the rules are intended to be focused on certain types of futures, options and repos that produce a guaranteed return and the key factors that will need to be considered are whether the return is derived by reference to the time value of money, at a rate comparable to a commercial rate of interest and is practically certain to be produced.
With respect to the question of speciality debts and the imposition of withholding UK tax at source on interest income arising on such debt arrangements, the legislation has been amended to definitively state that no account should be taken of the location of any deed in determining whether the person paying the interest should withhold tax.
In addition, where interest is included within a compensation payment, legislation will make clear that the person paying the compensation will be obliged to deduct income tax at source.
Legislation has been introduced to enable small companies to transfer the business and assets to its shareholders in the event that they wish to continue the business in an unincorporated form without giving rise to adverse corporation tax consequences on the company. Claims will need to be made within two years of the date of transfer of the business and will be restricted to chargeable assets of less than £100,000 which therefore may minimise the likelihood of attracting the relief for a considerable number of SMEs.
As signalled last week, the thresholds for the Lifetime Allowance and Annual Allowance for pensions for the 2014-15 tax years onwards are dropping to £1.25m and £40k respectively. This will be felt hardest by individuals nearing retirement who typically have the means and greatest incentive to ensure they have a sufficient retirement pot.
The Government is aiming to encourage investment by allowing large companies undertaking R&D activities to claim an above the line (ATL) credit of 9.1% of their qualifying expenditure incurred on or after 1 April 2013. The ATL credit scheme will initially be optional and companies will be required to elect to claim R&D relief under this scheme. The small and medium company R&D regime which offers a generous 225% deduction for costs which managers are increasingly benefitting from remains unchanged.
Cap on income tax relief
Further to announcement at Budget 2012, the Government is implementing a limit on currently uncapped income tax reliefs with effect from April 2013. The cap will be set to the greater of £50,000 or 25% of income. This will frustrate many who have typically looked to reliefs put in place by the Government to manage their tax bill.
Inheritance tax (IHT): spouses and civil partners domiciled outside the UK
This will impact treatment of transfers between UK-domiciled individuals and their non-domiciled spouse or civil partners in the following ways with the life time limit on the amount that can be transferred exempt from IHT to a spouse or civil partner domiciled outside the UK increased from its current level of £55,000 to £325,000, and it will be linked to any further changes of the nil-rate band.
Additionally, individuals domiciled other than in the UK and who are married or in a civil partnership with a UK domiciled person will be able to elect to be treated as UK-domiciled for IHT purposes.
Where an individual chooses not to elect for UK domicile treatment their overseas assets would, as now, be exempt from IHT but any transfers from their spouse or civil partner would be subject to the increased cap. Individuals who choose to make an election would benefit from uncapped IHT-exempt transfers from their spouse or civil partner, but subsequent disposals by them would be liable to IHT, irrespective of the location of the assets. This measure will have effect in relation to transfers of value made on or after 6 April 2013.
Taxation of residential property
As announced in the 2012 Budget, an annual residential property tax (ARPT) is to be introduced with effect from 1 April 2013. This ARPT will be levied on companies, collective investment schemes and partnerships with corporate members who own UK residential property worth more than £2m.
The draft legislation provides for a number of welcome exemptions including where the property is used for a genuine commercial property development, rental, or a trading business. The ARPT ranges from £15,000 for residential properties worth £2-5m up to £140,000 for residential properties valued at more than £20m.
A 15% rate of SDLT on the acquisition of residential properties of more than £2m by certain non natural persons was introduced in the Finance Act 2012. The draft 2013 Finance Bill is now set to introduce a number of reliefs (mirroring those that will apply for the ARPT) such that a reduced SDLT rate of 7% will apply to persons who would not be subject to the APRT. Relief will be available from Royal Assent of the 2013 Finance Bill.
Measures are to be introduced to bring in a CGT charge payable by certain non UK non-natural persons who fall within the scope of ARPT when they dispose of interests in residential property for more than £2m in the UK. The CGT charge will not be extended to offshore trustees who hold property direct and those persons that qualify for a relief from ARPT will not fall within this capital gains tax charge. A CGT charge rate of 28% will apply with a tapering relief available where the value of the property falls just over the £2m threshold. The charge will apply to gains accruing on or after 6 April 2013.
Consideration is being given as to whether to apply this regime to similar disposals made by UK resident entities which would fall within the definition of non-natural persons under ARPT, although the tax charge would be lower as it would be based on corporation tax rates. Draft legislation is expected to be published in January 2013.
It should be noted that the Chancellor has previously explicitly stated that the Government will take retrospective action against anyone seeking to avoid these new provisions.
Corporation tax: exit charges
Broadly, exit charges arise from deemed disposals of company assets when a company ceases to be a UK tax resident. In order to minimise any cash flow disadvantage arising from a transfer of corporate residency to another EEA Member State, two options are being proposed to defer the payment of exit charges.
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