When the Square Circular reaches the winter cycle, thoughts naturally turn to potential Arctic conditions. Little wonder that this issue of the Square Circular focuses on the celebrated Arctic Systems case and the steps proposed by HMRC to counter the taxpayer’s victory a few months ago in the Arctic case.
Apart from that, there are a few other points which we hope will be of interest both as regards business tax and personal tax. If you want any further details about any of the matters we’ve mentioned in this issue, or indeed, about any matters we haven’t mentioned please do contact us on 0161 832 4841.
The last few months of 2007 were quite hectic; recent work included our role as Reporting Accountants to BAQUS Group plc on their admission to AIM in December, involving the simultaneous merger of three nationally spread practices of Quantity Surveyors and an AIM float. The deal was led by Stephen Jolley.
Adrian Berg advised Wynnstay Group plc, an AIM listed client, on its acquisition this month of a Midlands based chain of pet superstores, Wilsons Pet Centres Ltd.
INCOME SHIFTING – SHIFTING THE GOALPOSTS
The draft legislation promised for post 5 April 2008 to counteract the House of Lords decision in the Arctic Systems case could well be quite far reaching as far as tax planning is concerned.
The tax planning arrangements of Mr & Mrs Jones, the taxpayers in the Arctic Systems case were, you might think, standard arrangements. They held shares in their company equally but Mr Jones was the brains behind the company and the company profits were essentially derived from his skills. Salaries were nominal and, for the most part, the profits were distributed to the shareholders as dividends, thereby taking advantage of both spouses’ allowances and basic rate band of tax. Sounds familiar? HMRC didn’t think it fair that some individuals are able to dissociate themselves from income so as to have it taxed in the hands of another individual at a lower rate and thought that they could stop such arrangements using the “settlements” legislation. The Courts felt that they couldn’t; hence the need to shift the goalposts.
In broad terms the proposed new rules will apply where company dividends or partnership profits are shifted from a higher to a lower rate taxpayer where the higher rate taxpayer doing the shifting has control over the shifting arrangements and over the amount of income that is shifted. Before 5 April 2008 one course of action for companies might be to pay dividends but what can be expected beyond then?
Some review of partnership profit sharing arrangements and company dividend payments will be required to see if income is being distributed reasonably in relation to the capital, skills and effort put into the business by the partners/shareholders. Income shifting doesn’t just affect spouses. It can affect family companies where there may be two or three generations of shareholders. There will be some cases definitely not affected by the proposals. Then there will be borderline cases where we can defend the status quo by bringing supporting documentation to demonstrate which family members have contributed to the business. Finally, there will be those cases definitely caught by the proposed rules where structural changes to the profit sharing arrangements between partners or owners of a company are required so as to reflect more accurately the commercial nature of their relationships to the business.
We think that the proposed rules could deeply affect many small family businesses. Further details about implementation are likely to emerge from discussion on HMRC’s guidance in the process of the proposed draft legislation getting to the 2008 Finance Bill. The extent to which your partnership or company may be affected and what you should be doing post 5 April 2008 should emerge in discussion with us. We will tell you more in due course but if you do have any concerns in the meantime, please feel free to call your usual contact partner or our tax partner, Simon Topperman.
Here’s an interesting snippet of information. We’re sure you know that a company has 12 months in which to submit its corporation tax return (Form CT600). For example, the CT600 for the year ended 31 March 2007 has to be submitted by 31 March 2008. HMRC then have 12 months in which they can select the return for Enquiry. It makes no difference when you submit the return. You can submit it on 1 April 2007 or 30 March 2008; HMRC can raise enquiries until 31 March 2009.
Some people have seen this practice as a disincentive to early filing. Why give “them” an extra period of time in which to select your return for enquiry? Whilst we’ve never been impressed by this argument, we can appreciate that there is no incentive to file early if you can not have the certainty that the enquiry window has closed until two years after the end of the company’s accounting period.
HMRC have announced a change in their practice for periods ending after 31 March 2008. In future the enquiry window will close 12 months after the CT600 is received by HMRC. So, if your CT600 for the year ended 30 April 2008 is received on say 26 November 2008 the enquiry window closes on 26 November 2009 rather than 30 April 2010, as would previously have been the case.
It means you get certainty sooner.
Don’t forget that April 2008 sees an overhaul of the capital allowances regime announced in last year’s Budget. There may not be a fortune involved for everyone, but if your expenditure on plant and fixtures over the next year is likely to be over say £50k, let us have your capital expenditure budget and we can tell you when to spend your money assuming you have flexibility of timing.
In our Autumn 2007 Issue (Issue 19) we brought to your attention the proposed pre-Budget Report changes in CGT, notably the loss of taper relief and indexation allowance. Draft legislation promised for December was delayed; perhaps the howls of protest following the proposals have provoked some tinkering with the proposals. Draft legislation should be with us any day now. Indeed, between us writing this and you reading this, things may have moved on.
Assuming there are no major changes to the original proposals, it is a safe assumption that there will be those who seek to find some way of “banking” their taper relief before it’s too late. In the case of assets held since long before 1998, indexation allowance may be a significant factor and some people may seek to “bank” their indexation allowance before it’s too late.
We suppose it makes sense to wait for the legislation (any day now!) but there’s no harm in having possible ideas in the meantime. If you think you may need to take steps to safeguard your indexation allowance or taper relief please let us know so we can share our ideas with you.
FAMILY DEBT SCHEME
Suppose that a married person owns a valuable investment asset, such as property or shares on which there is potentially a substantial capital gain and as part of an Inheritance Tax planning exercise he wants to pass the asset on to the next generation. There are two snags. The first is the CGT. The second is that he needs the income derived from the asset but, as you probably know, if he reserves a benefit from the asset it isn’t really regarded as a gift.
It is actually possible to resolve this dilemma although admittedly the solution does depend upon there being the right set of circumstances. Let us know if you have the dilemma and see if we can help.
Apparently a letter from a taxpayer to a tax inspector read:
“I cannot pay the full amount at the moment as my husband is in hospital. As soon as I can, I will send on the remains”.