Northern Ireland Tax Developments February 2006
Author:
Phillip McMaw
The December Pre-Budget Report
Quite a number of significant matters were contained in the press releases issued on 5 December by HMRC, with most economic forecasters predicting uncertain times ahead as increasing government expenditure has to be funded by taxation. So no mention of tax cuts moving towards the “flat rate” systems becoming more prevalent in Eastern Europe or of a special corporation tax rate for Northern Ireland.
Business Taxation
- Draft legislation and technical notes have been published on the new rules for taxation of leased plant and machinery. The basic thrust of the law is that a long-term funding lease should generally be treated as a loan, with the lessee entitled to claim capital allowances. All leases concluded by 31 March 2006 will continue to be dealt with under the existing law.
- Real Estate Investment Trusts took another step forward and it looks likely that legislation will arrive in 2006. The REITS regime should make it easier to structure property investments without the traditional double tax charge associated with existing property companies. The proposals here have been broadly welcomed by the property sector.
- Planning Gain Supplement - if REITS was the good news, then PGS is the bad. Confirming previous speculation in the press, government announced proposals to introduce a new tax based on the value uplift when planning permission is granted. Memories of previous regimes in the past - such as Development Land Tax - have been mixed and much reaction to this announcement was negative. Principal concerns include the prospect of developers having to pay PGS before funds are generated from a land development and an overall increase in the tax burden for developers given the proposal that PGS should at best be a tax-deductible and not creditable expense.
- The 0% corporation tax rate is to be abolished along with the complex rules on non-corporate distribution rates and we will probably revert back to the prior position of a 19% small company rate on profits up to £300,000.
- There was a further update on the long-running consultation process on the reform of corporation tax.
- Other measures included proposed improvements to the R&D credit regime, an overhaul of the Treasury Consent rules, first year capital allowances for small businesses and action to stop tax planning involving the intangible assets rules.
Personal Taxation and Anti-Avoidance
- More controversy on pensions as the enticing prospect of self-invested funds being able to invest in residential property, art, antiques and classic cars was scrapped.
- An important announcement was the expansion of the tax avoidance disclosure rules to cover all types of corporation tax, income tax and capital gains tax planning. Certain aspects of the rules are also to be changed and the new system comes into effect in April 2006. It is to be hoped that the "filters" used to screen out normal tax planning will be clearly set out by Revenue otherwise a mountain of disclosures will commence in April.
4Certain tax planning schemes designed to generate capital losses through the use of capital redemption contracts have been blocked.
4The Transfer of assets abroad legislation in Sections 739-741 ICTA 1988 has stood on the statute books for a long time and has now been extended. Draft legislation has been published and will apply in its final form to transactions or income arising on or after 5 December 2005. The general approach has been to make the tests for securing exemption more onerous and it expressly states that the intentions of any professional advisers can be taken into account.
Marks and Spencer
Previous editions of Tax Notes have followed this case through the Courts and the ECJ delivered its final judgement on 13 December 2005. Although the headline decision went in favour of the company, it is probably fair to say that most subsequent comment considered that only a limited tax loss would be suffered by the UK Government as a consequence.
The facts of the case are well known and concerned a claim by the company to claim relief against UK taxable profits for losses incurred by overseas subsidiary companies which were ceasing to trade.
In summary, the ECJ ruled that the UK's group relief rules constituted a restriction on the freedom of establishment but were generally justified by over-riding reasons in the public interest. However the principle of proportionality had not been properly observed and group relief should be permitted where:-
4the foreign subsidiary has exhausted the possibilities of utilising the losses for domestic tax purposes in its own member state in respect of current and previous accounting periods, and
4there is no possibility of the foreign subsidiary utilising the losses in its own member state in future accounting periods.
It is likely that relatively few claimants will be able to pass these tests and therefore the actual impact of the decision may not be as wide as originally thought.
Arctic Systems
The Court of Appeal has found in favour of the taxpayers in this long-running case, which has attracted a high profile. The case concerned a company owned equally by the taxpayer and his wife. The company's trade comprised the provision of services by the taxpayer, who drew a small salary with the remaining profits distributed as dividends. HMRC's argument was that the settlements legislation in Section 660A ICTA 1988 applied, with the result that the dividends paid to the wife should be taxed as the taxpayer's income.
The taxpayer had lost before the Special Commissioners and High Court, but succeeded at Court of Appeal, where it was held that the settlements legislation did not apply. The ruling has of course been welcomed by the Professional Contractors Group and other parties. HMRC still has the option of appeal, but the Court of Appeal has refused leave to do this and HMRC will have to apply to the Lords if they wish to pursue it further.
Phillip McMaw is Tax Partner with KPMG in Belfast.