Inland Revenue Tax Bulletin - Issue 56

Contents

Interpretations

Miscellaneous

Editorial

This is my first issue as Editor of Tax Bulletin.

Articles appearing in Tax Bulletin publicise our view of the law and indicate how the Department will apply the law in a particular area. Our view is not always accepted and there is of course nothing to preclude an argument being taken on appeal to the Commissioners or Courts.

Although I am unable to enter into correspondence with readers about Tax Bulletin or its contents, I am interested in hearing about what topics you would like us to cover, as well as what you think about past and current articles and am open to suggestions. Readers can e-mail or write to me at the address given on the final page.

Tax Bulletin is covered by Crown Copyright. There is no objection to firms copying the Bulletin for their own use. Anyone wishing to republish Tax Bulletin or extracts more widely should write to Ms Nahid Shariff, further details on page 910. All requests must be made in writing.

Readers who wish to continue receiving Tax Bulletin for the year 2002 are reminded to send in their renewal forms which were sent out with the October issue of Tax Bulletin, if they have not already done so.

Julia Hawkes

(No longer relevant)
Liability to pay Class 1 National Insurance Contributions: Internationally mobile employees

Introduction

This article sets out the Revenue’s current practice for dealing with questions of Class 1 National Insurance Contributions (‘NICs’) liability in the most common scenarios when options are granted by employers to and subsequently exercised by an internationally mobile workforce.

Share incentives available to internationally mobile employees can take various forms. This article is about share and stock options and is concerned only with;

  • options granted under an unapproved share option plan; and
  • non-qualifying exercises of options granted under an Inland Revenue approved plan.

Employees can be granted options to acquire shares in their employing company or a company in the same group. Typically the employee is granted options to acquire a specified number of shares at a price fixed at grant - the "option price". This may be set at the market value of the shares at the date of grant or at a lower figure. The option will normally then be exercised at a later date, when the employee buys shares at the option price. The shares then belong to the employee and can usually be immediately sold.

Liability to pay

The NICs treatment of such options in the hands of the employee depends on such factors as:

  • whether the worker is a EC national and falls within UK legislation under Council Regulation European Economic Community (EEC) 1408/71;
  • whether the worker falls within UK legislation under a Social Security Reciprocal Agreement or Double Contribution Convention;
  • whether or not it was granted under a plan providing income tax advantages - the Inland Revenue approved Company Share Option Plan or a SAYE share option plan within Schedules 9 and 10 Income and Corporation Taxes Act (ICTA 1988), or an Enterprise Management Incentive (EMI) option within Schedule 14 Finance Act (FA) 2000 ;
  • the employee’s residence status at the dates of exercise;
  • the period over which the option can be exercised;
  • whether the option was granted at a price below the market value of the shares at the time of grant; and
  • whether there is a charge to income tax under Section 135 ICTA 1988 on exercise.

Enterprise Management Initiative (EMI) also provides income tax exemption on the exercise of certain share options, but NICs may be due if the options were issued at a discount to the share price or there has been a disqualifying event. To the extent that gains on such options remain in charge to NICs, this article applies to them in the same way as to unapproved share options. [Further information on approved plans and EMI can be found at: www.inlandrevenue.gov.uk/shareschemes]

A liability to pay Class 1 NICs may be triggered by other events, such as the assignment or release of an option to acquire shares, or the conversion of shares acquired by reason of employment from one class of share into another class of share. This article does not cover every possible situation but guidance about circumstances not dealt with here is available from the contacts listed at the end.

Interaction with Council Regulation European Economic Community (EEC) 1408/71 and Reciprocal Agreements/Double Contribution Conventions

The objectives of the EC legislation and Reciprocal Agreement (RAs) are to:

  • prevent a dual contribution liability;
  • prevent payment of contributions to systems where employees are unlikely to receive benefits; and
  • to reduce administrative burdens.

If the employee moves between EC and RA countries a NIC liability may arise whilst working in a different EC or RA country when the option is exercised, assigned or released - subject to certain conditions being satisfied. There are currently 18 RAs, listed as an appendix to this article (page 899) and, although the general principles of each agreement regarding liability to pay contributions are broadly similar to EC legislation, each RA must be checked individually.

Where a liability to pay Class 1 NICs arises the amount of earnings to be included for the calculation of NICs is the same as that chargeable (not what is eventually charged) to Schedule E tax.

UK Domestic Legislation

If EC legislation or a RA do not apply for employees coming from or going to ‘rest of the world’ (‘ROW’) countries, NIC liability will be determined in accordance with UK NICs legislation.

Examples

In the following examples:

  • all the share option plans are unapproved; and
  • all tax references are to the Income and Corporation Taxes Act 1988 (ICTA) unless otherwise stated.

Example 1: European Economic Area (EEA) - Option granted in UK and exercised while on short secondment to France (EEA)

Alan is resident and ordinarily resident and working in the UK on 1 June 1999. On that date his UK employer grants an option to purchase 1000 shares in the company in two years’ time at the 1 June 1999 market price of £1. On 1 July 2000 Alan is seconded to France for 12 months only and is still in the employment there when the option is exercised on 1 June 2001. At that date the value of the shares is £5 each.

Alan is resident and ordinarily resident in the UK at the date of grant and is therefore liable to income tax under Section135 on any gain realised at exercise.

Under Article 14.1(a) of Council Regulation (EEC) 1408/71 Alan is a ‘posted worker’ and remains subject to UK legislation. Under Section 4(4)(a) Social Security Contributions and Benefits Act (SSCBA) 1992 a liability to pay NICs arises on exercise of the option. The gain is calculated as the difference between (a) the value of the shares at the date of exercise and (b) the option price paid plus any consideration given for the option itself; in this case the gain is 1,000 x (£5 - £1) £4 = £4,000.

Example 2: EEA - Option granted in the UK by UK employer and exercised when on long secondment to Netherlands (EEA)

Peter is resident and ordinarily resident and working in the UK on 1 June 1999. On that date his UK employer grants an option to purchase 1000 shares in the company in two years’ time at the 1 June 1999 market price of £1. On 1 July 2000 Peter is seconded to Netherlands for 3 years and is still in the employment there when the option is exercised on 1 June 2001. At that date the value of the shares is £5 each.

Peter is resident and ordinarily resident in the UK at the date of grant and is therefore liable to income tax under Section 135 on any gain realised at exercise.

Although a posted worker, no application is made to subject Peter to UK legislation for the period of the secondment. Peter is therefore subject to Netherlands legislation under Article 13.2(a) of Council Regulation (EEC) 1408/71. On date of exercise Peter would not normally fall within UK legislation.

However, in 1997 the EC Administrative Commission concluded that a person should normally be subject to the legislation of the Member State where the income related to a period of employment in the Home State rather than be subject to the legislation of the Member State at the actual time of payment. As the gain on the share option was realised from a period of employment in the UK a liability to pay Class 1 NICs on that gain arises under UK legislation in the normal way.

The gain is calculated as the difference between (a) the value of the shares at the date of exercise and (b) the option price paid plus any consideration given for the option itself; in this case the gain is 1,000 x (£5 - £1) £4 = £4,000.

Example 3: EEA - Option granted in the UK by UK employer and exercised when in different employment in Germany

The facts are similar to example 2 except that Barbara leaves her UK employment on 1 July 2000 to work permanently for a German employer for 3 years. Barbara is resident and ordinarily resident in the UK at the date of grant and is therefore liable to income tax under Section 135 on any gain realised at exercise.

Under Article 13.2(a) of Council Regulation (EEC) 1408/71 Barbara would be liable to pay social security contributions under the legislation of the EC country of employment. On date of exercise Barbara would not normally fall within UK legislation. As in example 2 the EC Administrative Commission concluded that a person should normally be subject to the legislation of the State where income related to a former period of employment.

As the gain on the share option was realised from a former period of employment in the UK a liability to pay Class 1 NICs on that gain arises under UK legislation in the normal way and on the same amount as for Alan.

Example 4: Reciprocal Agreement (RA) - USA national working for UK employer and option granted by UK employer

Caroline is a USA national working for an UK employer. She is resident but not ordinarily resident for tax purposes in the UK when the option is granted on 1 June 1999 over 1000 shares. Caroline is still resident and working in the UK when she exercises the option and sells the shares on 1 July 2000. The option price is £1 per share and the value and sale price at 1 July 2000 is £5 per share.

Under Article 4 of The Social Security (United States of America) Order 1997 (‘USA RA’) Caroline is subject to UK legislation. At the time of the grant the UK tax charge in respect of the employment, she is resident but not ordinarily resident and is liable to income tax under Case II of Schedule E, not under Case I of Schedule E. Section 135 does not apply. As Section 135 does not apply there can be no liability to pay Class 1 contributions on exercise.

Caroline will be liable to UK income tax under S162(5) at the time of disposal of the shares. The charge is on the difference between the market value of the shares at the time of exercise less any amounts paid. This is treated as a notional loan written off within S160(2) and as emoluments of the employment. The emolument is (1000 @ £5) - (1000 @ £1) = £4000. There will also be a Class 1A NICs liability on the same amount.

Example 5: RA - USA national and option granted by USA employer; subsequently seconded to UK and option exercised

David is a USA national working for a US employer. David is neither resident nor ordinarily resident in the UK when a stock option over 1000 shares in the US employer is granted. He is subsequently seconded to work in the UK for 6 years. David exercises the US stock option when working in the UK and sells the shares. The price of the option is £1 per share and the price on exercise is £4 per share.

At the time of the grant there is no UK tax charge in respect of the employment. David will not be liable to UK income tax on any gain realised at exercise, unless the grant of the option is clearly related to duties performed in the UK.

As Section 135 does not apply there is no liability to pay Class 1 contributions on exercise.

There could be a liability under Section 162 and Class 1A NICs may be payable although all relevant facts and circumstances would need to be considered before determining whether or not a liability arises.

{Had the secondment been for no more than 5 years David would have been subject to US legislation under Article 4.2 of the USA RA and there would be no liability for any class of contribution under UK legislation, whether or not there was any liability to UK income tax}

Example 6: RA - UK National, option granted by UK employer; subsequently seconded to USA and option exercised

Elena is resident and ordinarily resident in the UK and working here on 1 June 1999. On that date her UK employer grants an option to purchase 1,000 shares in the company in two years’ time at the 1 June 1999 market price of £1. On 1 July 2000 she is seconded to the US for 6 years and is still in the employment there when the option is exercised on 1 June 2001. At that date the shares are worth £5 each.

Elena is resident and ordinarily resident in the UK at the date of grant and is therefore liable to income tax under Section135 on any gain realised at exercise. Under Article 4.1 of the Social Security (United States of America) Order 1997 she is subject to US legislation. On date of exercise there is no liability to pay UK contributions.

[Had the secondment been for no more than 5 years Elena would have been subject to UK legislation under Article 4.2 and Class 1 NICs would have been payable.]

Example 7: Rest of the World (ROW) - UK national, options granted by UK employer; subsequently seconded to Nigeria and option exercised

Frank is resident and ordinarily resident in the UK and working here on 1 June 1999. On that date his UK employer grants an option to purchase 1,000 shares in the company in two years’ time at the 1 June 1999 market price of £1. On 1 July 2000 he is seconded to Nigeria on secondment for 3 years and is still in the employment there when the option is exercised on 1 September 2001. At that date the shares are worth £5 each.

Frank is resident and ordinarily resident in the UK at the date of grant and is therefore liable to income tax under Section135 on any gain realised at exercise.

Under regulation 146 Social Security (Contributions) Regulations (SSCR) 2001 a liability to pay UK social security contributions continues for the period of 52 weeks from the date of leaving the UK. As the exercise of the option is after the period of continuing contribution liability no further Class 1 NICs are payable.

Example 8: ROW - Peruvian national; on secondment from ROW country to UK employer. Option granted by UK employer

Nolberto is a Peruvian national who arrives in the UK on 1 May 1999 on secondment from his Peruvian employer to work for a UK employer. He is resident but not ordinarily resident for tax purposes in the UK when the option is granted on 1 May 1999 over 1000 shares. Nolberto is still resident and working in the UK when he exercises the option and sells the shares on 29 April 2000. The option price is £1 per share and the value and sale price at 29 April 2000 is £5 per share.

Nolberto will be liable to UK income tax under S162(5) at the time of disposal of the shares. The charge is on the difference between the market value of the shares at the time of exercise less any amounts paid. This is treated as a notional loan written off within S160(2) and as emoluments of the employment. The emolument is (1000 @ £5) - (1000 @ £1) = £4000.

No Class 1A is payable. Under regulation 145(2) SSCR there is a 52 week period of exemption from liability to pay a Class 1, Class 1A or Class 1B contribution beginning from the date of entry into the UK.

Example 9: ROW - Argentine national and option granted by Argentine employer; subsequently seconded to UK and option exercised in UK employment

Eva is a Argentine national working for a Argentine employer. Eva is neither resident nor ordinarily resident in the UK when a stock option over 1000 shares in the Argentine employer is granted. She is subsequently seconded to work in the UK for a UK employer for 3 years. Eva exercises the Argentine stock option when working in the UK and sells the shares. The price of the option is £1 per share and the price on exercise is £4 per share.

At the time of the grant there is no UK tax charge in respect of the employment. Eva will not be liable to UK income tax on any gain realised at exercise, unless the grant of the option is clearly related to duties performed in the UK.

As Section 135 does not apply there is no liability to pay Class 1 contributions on exercise.

There could be a liability under Section 162 and Class 1A NICs may be payable if the option is exercised after the 52 week exemption period although all relevant facts and circumstances would need to be considered before determining whether or not a liability arises.

Further advice

For further advice on this bulletin governing the liability to pay NICs on share options, contact:

Steve Hickson
Revenue Policy
Personal Tax
Room 75E
Benton Park Road
Newcastle Upon Tyne NE98 1ZZ
Tel 01912256029
E-mail: Steve.Hickson@ir.gsi.gov.uk

And for further advice on international tax aspects, contact:

Susan New
Revenue Policy International
Victory House
30-34 Kingsway
London WC2B 6ES

Tel: 020 7438 7250
E-mail: Susan.New@ir.gsi.gov.uk

Barbados Israel Mauritius
Bermuda Jamaica Philippines
Canada (DCC) Japan (DCC) Switzerland
Cyprus Jersey Turkey
Guernsey Korea (DCC) USA
* Isle of Man Malta Yugoslavia (including former Republics)

* The Agreement with the Isle of Man is limited and liability is generally determined under place of residence

Interpretations

(Superseded by EIM35050 & EIM35055)

Travel Expenses of Employees not Domiciled in the United Kingdom

Travelling Expenses of Employee’s Family

Section 195 ICTA 1988 applies to the travelling expenses of employees who are not domiciled in the United Kingdom but perform the duties of an employment in this country. It permits a deduction from emoluments chargeable to tax under either Case I or Case II of Schedule E in circumstances where Section 198 ICTA 1988 would not apply.

The expenses of an employee’s family in travelling between the UK and their normal place of abode in another country will also qualify for a deduction under Section 195 where the following conditions are satisfied -

  • The employee must be domiciled in a state other than the UK and receive emoluments from duties of an office or employment performed in the UK.
  • The cost of travel by family members must be borne or reimbursed by (or on behalf of) the employer and be an assessable emolument of the employee.
  • The employee must be present in the UK for the purpose of performing the duties of one or more offices or employments for a continuous period of 60 days or more.
  • The journey has to be undertaken by the family to either:
    • accompany the employee at the beginning of the continuous period of 60 days or more, or
    • visit the employee during such a period or to return afterwards.
  • The journey must be made within five years of a qualifying arrival in the UK by the employee.

The deduction is limited to two outward and two return journeys by the same person in any year of assessment.For guidance on how these conditions apply in practice see SE35000 in the Inland Revenue Schedule E Manual.

Meaning of a Continuous Period of 60 days or more

We have been asked about the requirement in Section 195(6) that "the employee is in the UK for a continuous period of 60 days or more". Our current approach, described at SE35050, has been to ignore an occasional day’s absence from the UK due to a genuine business trip abroad. However, an increasing number of non-domiciled employees who are based in the UK are required to travel extensively outside the UK. These employees are finding it increasingly difficult to satisfy the 60 days rule because they are outside the UK for more than one day at a time.

From the date of this publication, therefore, we are prepared to accept that, for the purposes of Section 195(6) only, employees satisfy the 60 days rule where -

  • they spend at least two thirds of their working days in the UK over a period of 60 days or more; and
  • they are present in the UK for the purpose of performing the duties of their employment both at the start and at the end of this period.

This will make it easier for employees who are sent to work in the UK and who travel outside the UK on business to satisfy the conditions permitting a deduction for family travel expenses. We think that this more accurately reflects employment in international business whilst preventing a deduction for travelling expenses of an employee’s family where the employee simply makes frequent short business trips to the UK. This will apply to any self-assessment made from now on or to any self-assessment that can be amended within the usual time limits.

This approach will also apply to liability to Class 1 National Insurance contributions as Paragraph 5 of Part VIII of Schedule 3 to the Social Security (Contributions) Regulations 2001 was aligned with Section 195 with effect from 6 April 2001.

The following three examples show how the new approach may work in practice.

Example 1a

Anita has been sent to the UK to work for 12 months as a project manager based at the European Headquarters of a multi national corporation. Her family accompanies her at the start of her assignment. During the first 60 days of her assignment, she spends 20 days working at her UK office and 10 days working outside the UK.

Anita will be entitled to a deduction for the travelling expenses of her family. She has spent two thirds or more of her working days during a 60 day period in the UK.

Example 1b

The facts are the same as in Example 1a except that during the first 60 days of her assignment, Anita spent 10 days working at her UK office and 20 days working outside the UK.

Anita does not satisfy the 60 day rule at the 60 day point. However, if she spent her next 30 working days in the UK, she would be entitled to a deduction for the travelling expenses of her family as she would have spent more than two thirds of her working days in the UK during a period of 60 days or more.

Example 2

Jack was sent to the UK to work for the UK subsidiary of a US finance house in January 2000. He is required to travel extensively outside the UK on business.

His employer pays the travelling expenses of his family who arrive in the UK to visit him for two weeks on 1 July 2000. At that time, Jack had just returned from a five day business trip to the Far East on 30 June and was later recalled to the US on business for three days arriving back in the UK on 29 July. Between 1 June and 30 July, Jack worked on 30 days of which 21 were spent working in the UK.

Jack will be entitled to a deduction because his family visited him during a period of 60 days when two thirds or more of his working days were days spent working in the UK.

Example 3

Sonia is sent by her French employer to work in the UK to oversee the installation and testing of a new computer system at its UK subsidiary. She arrives in the UK on 1 May 2001. She completes her UK assignment on 15 June having spent 24 out of 33 working days in the UK. Sonia then stays on in the UK to visit friends and doesn’t leave until 10 July.

Her employer pays the travelling expenses of her husband who arrives in the UK to join her on 10 June.

Sonia would not be entitled to a deduction for her husband’s travelling expenses. The period when she is in the UK for the purpose of performing her duties is only 46 days i.e. 1 May - 15 June so the 60 day rule cannot be satisfied.

Further information

Martin Delnon
Personal Tax (Technical)
Sapphire House
550 Streetsbrook Road
Solihull
B91 1QU

Tel: 0121 713 4634
Fax: 0121 713 4620
E-mail: Martin.Delnon@ir.gsi.gov.uk

!This article is no longer current (Deleted Index 2002)

Change of interpretation: Taxability of trade debt written back

Accounting periods starting after 31 December 2001

We have been considering the tax treatment of trade debts written back to the profit & loss account. This article sets out our revised view. We no longer consider that the decision in the 1932 tax case British Mexican Petroleum Company Ltd v Jackson, 16TC570, is applicable in determining the tax treatment of trade debt written back. That case concerned a release of trade debt which was credited to balance sheet reserves in rather unusual circumstances. Modern accountancy practice is that a write-back of trade debt must always be credited to the profit & loss account to produce accounts which show a true and fair view. It is now our view that the correct computation of profits chargeable to tax under Schedule D Cases I and II should include the credit to profit and loss account of a trade debt write back.

We propose to apply this change of interpretation for accounting periods starting after 31 December 2001. The current guidance in the Inspector’s Manual will be replaced by the following text. If you are reading this article some time after publication please check the relevant Manual for the latest version of the guidance.

IM380

Accounting periods starting after 31 December 2001

No tax computation adjustment should be made to the accounts of a trade, profession or vocation which show a credit to the profit and loss account for trade debt written-back unless the debt is released as part of a voluntary arrangement (see IM381).

A trade debt is a debt which has been allowed as a deduction for tax purposes. It does not include debts incurred for capital or non-allowable expenditure. Loan relationships of companies have separate legislation in FA96.

Accounting periods which started on or before 31 December 2001

Where a trade debt is wholly or partly released by the creditor the amount released is to be treated as a receipt of the trade, profession or vocation when it is released, unless it is released as part of a voluntary arrangement, ICTA88/S94, (IM381 explains the exception for a voluntary arrangement).

Where a trade debt is written back to the profit and loss account but is not released, a tax computation adjustment should be made to deduct the amount. This follows long standing practice on the interpretation of British Mexican Petroleum Company Ltd v Jackson, 16TC570.

ICTA88/S94 and release

ICTA88/S94 only applies when there is a release of a debt. It does not apply if the creditor merely writes off the debt, fails to invoice or demand payment, or fails to present a cheque for payment. A debt is not deemed to be released because the debtor is bankrupt or in liquidation.

The ‘release’ of a debt must involve a contractual agreement. Where this is under seal no consideration is necessary. All other releases must involve the debtor giving consideration for the release. The consideration may be in non-monetary form, for example shares.

A formal waiver of remuneration is also a release of a debt.

Intra-group debt may be released as part of a sale agreement involving a change of control of a company. These transactions usually have to be examined in detail to ascertain what amounts are trade debt and whether there has been a release.

Intra-group debt may also be released as part of a "hive-across" within a group, where all the assets and liabilities of a company are transferred to another company within the same group of companies, and as a result-

  • the transferee assumes the obligation to repay the creditor; and
  • the creditor consents to release the transferor from its obligations in return for the transferee accepting them.

In this situation there is a release of a debt so ICTA88/S94 applies, but Case I principles also require the consideration given by the transferor to the transferee for accepting the liabilities to be deducted in computing profits which include any ICTA88/S94 receipt. And so, if full consideration is given (by transfer of assets), the net result is that the ICTA88/S94 receipt is matched in full by the related deduction.

Where the release occurs after the business has been discontinued (or treated for tax purposes as discontinued), the amount released is to be treated as a post-cessation receipt under ICTA88/S103 (see IM1751 onwards).

British Mexican Petroleum Company Ltd v Jackson, 16TC570

The facts reported in this case show that two trade debts were formally released. Under the terms of an agreement with the oil producing company the company was released from part of its trade debt for oil. The amount released was carried direct to the company’s balance sheet and shown as a separate item under the head ‘Reserve’. The company was also released from a trade debt owing for ship charter hire and this sum was taken to its profit and loss account. It was only the taxability of the sum taken to reserve which was in dispute. The House of Lords decision was that the sum was not taxable.

The Inland Revenue interpretation of this case was that no write-backs of trade debt were taxable, following comments made in the House of Lords. Unless a debt write-back falls within the conditions of ICTA88/S94 a tax computation adjustment should be made to deduct the write-back for accounting periods which start on or before 31 December 2001.

This interpretation is no longer considered to be a correct view of the way in which profits should be computed for Schedule D Cases I and II. The Revenue change of view was publicised in a Tax Bulletin article published in December 2001 and has effect for accounting periods starting after 31 December 2001.

IM381

Voluntary arrangement

There is no charge to tax when a trade debt is released as part of a voluntary arrangement under the 1986 Insolvency Act or S425 Companies Act 1985, FA94/S144. This is described in ICTA88/S94 as a "relevant arrangement or compromise". This has effect from 30 November 1993.

ICTA88/S74(1)(j) gives relief to the creditor when a debt is released as part of a relevant arrangement or compromise.

For further information on how this revised interpretation affects particular circumstances write with full details to

Diane Williams (Technical Adviser)
Business Tax
Room 4E7
22 Kingsway
London
WC2B 6NR

Tax Credit Relief

Chile - Additional Tax

The Inland Revenue considers that the additional tax (impuesto adicional/tasa adicional) charged in Chile is admissible for tax credit relief (see the Double Taxation Relief guidance manual at DT4851). But following a re-examination of the nature of this tax, we have modified our view of it. The tax is computed by reference to company profits and is charged when there is a distribution of those profits to a shareholder who is not resident in Chile. Although the tax charge arises as a result of the distribution, the tax is not a withholding tax. Therefore, whilst still accepting that the tax is an admissible tax, we have concluded that it qualifies for unilateral relief as underlying tax under Section 790(6) Income and Corporation Taxes Act 1988. This means that relief for it will be allowable only to a UK company which receives a dividend from a Chilean company, where the UK company directly or indirectly controls, or is a subsidiary of a company which directly or indirectly controls, 10% or more of the voting power in the Chilean company. The amount of relief due in a particular case (including any further claims arising from this change of view) should be agreed in the usual way with:

Revenue Policy International
Underlying Tax Group
Fitz Roy House
PO Box 46
NottinghamNG2 1BD

We will not seek to withdraw relief made in accordance with previous practice, which treated the tax as a withholding tax, for returns made prior to the publication of this change of view.

Turkey - Compulsory Fund Surcharge

The Inland Revenue has also reconsidered its view on the compulsory fund contribution, which is a surcharge applied to Turkish corporation tax. This surcharge has the effect of raising the rate of corporation tax. We now consider the surcharge to be a substantially similar tax to corporation tax, thus coming within Article 2(4) of the Double Taxation Agreement between the United Kingdom and Turkey. When a company resident in Turkey pays a dividend to a company resident in the United Kingdom which controls directly or indirectly at least 10% of the voting power in the company paying the dividend, the surcharge will be available for credit as underlying tax.

Any further claims to credit arising from this change of view should be sent to the Underlying Tax Group, whose address is given above.

If you have any other queries arising from these changes please contact

Kevin Madley
Revenue Policy International
Victory House
30-34 Kingsway
London
WC2B 6ES
Tel: 020 7438 6306
E-mail: Kevin.Madley@ir.gsi.gov.uk

Miscellaneous

! This Article Is No Longer Current (Deleted Index 2004)

Inheritance Tax: Wartime Compensation Payments

Extra-Statutory Concession F20 was revised and published on the IR website on 16 October. The text of the announcement is reproduced below but has been updated to reflect that claims by Jewish claimants will be handled by the Conference on Jewish Material Claims against Germany and those for non-Jewish claimants will be handled by International Organisation for Migration.

"Inheritance tax concession extended to include further wartime compensation payments

Extra-Statutory Concession F20 is revised from today, 16 October 2001, to cover payments being made from the German public law foundation "Remembrance, Responsibility and Future". The foundation provides financial compensation of fixed amounts for claimants (or, where appropriate, their surviving spouse) who were slave or forced labourers or other victims of the National Socialist regime during the Second World War. Claims by UK claimants are being dealt with by the International Organisation for Migration (non-Jewish claimants) and the Conference on Jewish Material Claims against Germany (Jewish claimants) and those claimants entitled to this concession are being advised by them at the time of their successful claim. The extended concession aligns these payments with comparable ex-gratia amounts from the UK Government to British groups held prisoner by the Japanese during World War II.

Under the present inheritance tax (IHT) rules, rights to such compensation, or the subsequent proceeds, could form part of the claimant’s estate for IHT purposes. Extra-Statutory Concession (F20) allows the amount of any compensation payment to be deducted from the claimant’s IHT chargeable estate, whether the payment is made to the claimant before their death or is made subsequently to their personal representatives.

The revised text of the concession is detailed below.

F20. Late Compensation for World War II Claims.

Schemes continue to be established in the UK and abroad which provide compensation for wrongs suffered during the Second World War era. When this is received by the original victim or their surviving spouse, this almost inevitably comes late in life when their plans for the disposal of their wealth have already been made. Ministers have agreed that the cash value of these claims may be excluded from inheritance tax in the following cases where compensation is paid in modest round-sum, or otherwise cash-limited, amounts:

  • single ex-gratia lump sums of £10,000 payable to each surviving member of the British groups interned or imprisoned by the Japanese during the Second World War or their surviving spouse as announced by the Government on 7 November 2000;
  • financial compensation of fixed amounts payable from the German foundation "Remembrance, Responsibility and Future" to claimants - or their surviving spouse - who were slave or forced labourers or other victims of the National Socialist regime during the Second World War.

Payments of this kind would normally increase the value of a deceased person’s chargeable estate at death, either because a claim paid in their lifetime has increased their total assets, or because the right to a claim not yet paid is itself an asset of their estate.

By concession, where such a payment has been received at any time, either by the deceased or his or her personal representatives under the arrangements, the amount of the payment may be left out of account in determining the chargeable value of his or her estate for the purposes of inheritance tax on death. Similarly, where a person qualifies for more than one payment then each amount may be left out of account.

All enquiries about this extra-statutory concession in particular cases (quoting the full name and date of death of the deceased plus the Inland Revenue Capital Taxes reference number if known) should be directed to:

Inland Revenue Capital Taxes - IHT
Ferrers House
PO Box 38
Castle Meadow Road
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Surcharge on late paid tax under income tax self assessment - Update

In the February 2001 issue of Tax Bulletin we told you we were seeking an authoritative view from the courts regarding surcharge for those who pay tax late. The statutory rule is that any tax ‘remaining unpaid on the day following the expiry of 28 days from the due date’ attracts surcharge equal to 5% of the unpaid tax.

Our published view was surcharge applies if any tax remains unpaid at any time on the 29th day. Typically the 29th day is 1 March or 29 February in a leap year. But on a number of occasions it had been argued against us that ‘remains unpaid on the day’ means throughout the 29th day so that tax paid on that day does not attract the surcharge.

This matter was considered by the High Court on 29 October 2001 in the case of Thompson v Minzly. The Judge found in our favour. Any tax remaining unpaid at any time on the day following the expiry of 28 days from the due date attracts surcharge.

For 2001 only we had relaxed our practice for applying surcharge by one day whilst we obtained the authoritative view from the courts. Having now obtained that view the relaxation is withdrawn for 2002 and later years. In the typical case of a return issued on or before 31 October all of the tax will need to be paid by 28 February to avoid surcharge. Similarly any tax remaining unpaid at any time on 1 August will attract the second surcharge.

Pension Schemes

Organisational Change

After 31 March 2001, the Pension Schemes Office (PSO) ceased to be an Executive Office of the Inland Revenue. Since 1 April 2001, the IR Savings, Pensions and Shares Schemes (IR SPSS) business stream, which is part of Capital and Savings, has been responsible for all Revenue aspects of the approval and audit of occupational pension schemes and personal pension schemes, including stakeholder pension schemes. Within IR SPSS, Pension Schemes Technical Advice (PSTA) is responsible for providing technical advice about pension schemes to internal and external customers and for the publication of internal and external guidance. Audit and Pension Schemes Services (APSS) is responsible for pension scheme audits, customer service and compliance. Despite these organisational changes, the people doing the work have not changed and the work is still carried out in the same locations as before.

Inland Revenue website www.inlandrevenue.gov.uk - Pension Schemes featured area

Since the last summary (in Tax Bulletin Issue 49, October 2000) the following manuals booklets and leaflets available on the website have been updated:

  • Practice Notes IR 12 (2001) - Occupational Pension Schemes
  • Guidance Notes IR 76 (2000) - Personal Pension Schemes (including Stakeholder Pension Schemes)
  • Occupational Pension Schemes - a guide for members of tax approved schemes (PSO 1).

The following booklets have been added to the website:

  • Personal Pension Schemes (including stakeholder pension schemes ) - a guide for members of tax approved schemes (PSO 2)
  • Occupational Pension Schemes - A guide for trustees of small self-administered schemes (PSO 3).

Pensions Updates (formerly PSO Updates)

Since the last summary (in Tax Bulletin Issue 49, October 2000), a further 38 Updates (Nos. 72 -109) have been issued. They are available on the Inland Revenue website (see above for details). Summaries of those most likely to be of interest to readers of TB are provided below. [N.B. Any reference to the Taxes Act means the Income and Corporation Taxes Act 1988 as amended].

Update 73- 6 November 2000

Definitive Documentation Reminder Procedure. IR SPSS operates a procedure for reminding schemes on interim documentation of the need to provide definitive documentation. From 1 January 2001, the 5 stage reminder procedure has been reduced to 4 stages. Explanation of how this operates in practice.

Update 75 - 20 November 2000

New edition of Guidance Notes IR 76. A summary of the changes in the new edition.

Update 76 - 20 November 2000

Pension Sharing on Divorce or Nullity. Explanation of the procedure that may be used to obtain approval of an occupational pension scheme which relies on standard documentation which does not contain the required pension sharing on divorce provisions.

Update 82 - 22 January 2001

Revision of Overseas Transfer Practice. Nearly all proposed transfers to overseas pension schemes had to be sent to the PSO (as was) for approval. From 6 April 2001, a new practice has been introduced which allows most transfers to be made without the prior consent of IR SPSS provided certain conditions are met and the transferee is not a controlling director. The details are set out in Practice Notes IR 12 (2001) at PN 10.39 and Appendix VI.

Transfers of contracted-out rights are unaffected: they still have to be notified to the National Insurance Contributions Office.

Update 84

Pension Sharing on Divorce or Nullity - calculation of the Pension Debit in Money Purchase Schemes and other miscellaneous points

PSO Update No. 62 sets out the changes to tax law and Inland Revenue practice to allow pension sharing in tax approved pension schemes.

This update:

• modifies the calculation of pension debit in money purchase schemes

• clarifies some other areas of practice relating to pension sharing on divorce.

Update 85 - 22 January 2001

Transfers to Personal Pension Schemes. Certain transfers from occupational pension schemes to personal pension schemes are subject to certification under Regulation 6(3) of the Personal Pensions Schemes (Transfer Payments) Regulations SI 1988 No.1014. These Regulations have been revised by the Personal Pension Schemes (Transfer Payments) Regulations SI 2001 No. 119. A new Appendix XI to Practice Notes IR 12 (2001) gives details of how a transfer must be calculated for certification purposes under the revised regulations some of which came into effect on 14 February 2001 and some on 6 April 2001.

Update 91 - 23 March 2001

Simplified Defined Contribution Schemes (SDCS). Due to lack of demand, the Inland Revenue ceased considering new applications for tax approval of SDCS under Chapter 1 Part IV of the Taxes Act from 1 April 2001.

Update 92 - 26 March 2001

Organisational Change. Explanation of the organisational change referred to above.

Update 94 - 29 March 2001

New Application Forms for Personal Pension Schemes (not Stakeholder Pension Schemes). Applications for tax approval of a personal pension scheme and applications to contract out used to be made to different offices - PSO and the National Insurance Contributions Office (NICO) respectively. From 6 April 2001, following the example of stakeholder pension schemes, both applications should be sent to IR SPSS; but NICO will continue to issue the contracting out certificates for personal pension schemes.

Update 95 - 23 April 2001

Old Pension Schemes and Pension Sharing on Divorce or Nullity. Certain old pension schemes (approved under the pre-1970 tax rules) can claim tax relief in respect of the investment growth of their funds provided the conditions of Section 608 of the Taxes Act are met. One condition is that the terms on which benefits are paid from the scheme do not alter.

Extra statutory concession B43 which applies to Section 608 has been amended to allow qualifying old schemes to continue to claim tax exemptions even though benefits from the scheme have been shared in accordance with the new pension sharing on divorce provisions that came into effect on 1 December 2000.

Update 98 - 18 June 2001

Time limits for Pension Scheme Services Enquiries. Clarification of the time limits within which "in depth" enquiries into the affairs of small self-administered schemes will be made.

Update 100 - 18 June 2001

Abandonment of Schemes and Cancellation of Approval Ab Initio. Notification of revised guidance in Practice Notes IR 12 (2000) of the position concerning the abandonment of both approved occupational pension schemes and schemes that have not yet been approved. Explains that approved schemes cannot be abandoned unless tax approval was granted on an invalid basis and the approval has been formally cancelled by IR SPSS.

Update 101 - 2 July 2001

Continuous Service. IR SPSS practice in respect of continuous service is set out in Practice Notes IR 12 (2001) at PN 7.15-21 and Updates Nos. 42 and 53. This Update gives details of a revised and improved procedure for dealing with continuous service claims and of a minor change of practice affecting controlling directors.

Update 102 - 2 July 2001

Prohibition on transactions between tax approved occupational pension schemes and non approved top up schemes. Explanation of the prohibition which affects small self-administered schemes in particular.

Update 104 - 20 August 2001

Commutation of Trivial Pensions. Occupational pension schemes may be commuted on the grounds of triviality in the circumstances set out in the Practice Notes IR 12 (2001) at PN 8.14 (a) and (b). Explanation of a change in practice so that, where a scheme changes its rules to permit commutation of trivial pensions for the first time, pensions already in payment may be commuted if certain conditions are satisfied.

Update 107 - 1 October 2001

Discretion. Clarification of the extent of IR SPSS’s discretion and authority when dealing with pension schemes.

Update 108 - 29 October 2001

Refund of Contributions Paid in Error. Announcement of a change in the criteria which must be met before refunds of premiums/contributions paid in error may be paid without reference to IR SPSS.

Update 109 - 29 October 2001

Transfers at or after Normal Retirement Date

The Practice Notes IR 12 (2001) stated that a transfer could not normally be made once a member reached normal retirement date unless the member had left pensionable service before that date and chosen to defer receiving benefits. Announcement of belated amendments to the Practice Notes to reflect a 1998 change in IR SPSS practice to generally allow such transfers so long as the member’s benefits are not in payment.

Pension Schemes: Loss of Tax Approval

Section 61 Finance Act (FA) 1995 introduced Section 591C ICTA 1988 which contains a special 40% tax charge on the value of funds held by certain occupational pension schemes that lose their tax approved status on or after 2 November 1994.

The tax approval system gives very favourable tax treatment to pension schemes whose sole purpose is providing retirement and death benefits for employees and their families. In particular, contributions to the scheme by the members and the sponsoring employers are tax deductible. The scheme’s investment income and capital gains build up tax-free and part of a member’s benefit can be paid as a tax-free lump sum.

Some schemes exploited these tax reliefs by making unauthorised changes to their trust deeds and rules in order to engineer loss of tax approval. Typically, loss of tax approval was followed by the trustees lending all or a large part of the scheme funds to the sponsoring employer; or by paying the scheme assets to the members as a lump sum rather than as a pension for life.

The tax approval system was not intended to be used in these ways. Consequently the special tax charge under Section 591C ICTA 1988 aims to discourage schemes from acting in ways that are contrary to the pensions purpose for which they were given tax approval.

The Pension Schemes Affected

In practice, the schemes that have exploited the tax approval system have all been small self-administered pension schemes. These are schemes which have fewer than 12 members and where the trustees directly manage the scheme investments. Normally the members are directors with controlling interests in the sponsoring employer and are also the scheme trustees. However, the misuse of the tax approval system could occur with any scheme that has only a small membership.

The legislation therefore focuses on pension schemes which either:

  • have fewer than 12 members, or
  • in the year before tax approval ceased, had as a member a person who was a controlling director of a sponsoring employer.

Schemes which are outside these categories will not be subject to the special tax charge if they lose their tax approval.

Calculation of the Tax Charge

The special tax charge applies to the market value of the scheme assets immediately before the date of cessation of tax approval. Market value has the same meaning as for capital gains tax purposes. There is, however, an exception for loans to connected persons. In these cases, the value of the loan is the amount outstanding (including any unpaid interest) regardless of whether the loan would (or could) be repaid or other factors that would normally be taken into account in determining market value.

Responsibility for Payment

Liability for paying the tax rests with the pension scheme "administrator" as defined in Section 611AA Income and Corporation Taxes Act (ICTA)1988. The scheme trustees are normally the administrator unless they have appointed someone else to be responsible for the statutory duties under the tax approval legislation. Section 606 ICTA 1988 sets out the fallback position if the administrator defaults: in such cases responsibility for complying with the administrator’s duties reverts to the trustees (where they had appointed someone else) or, ultimately, to the sponsoring employer.

To gain approval, a small self-administered pension scheme must appoint an independent trustee acceptable to the Inland Revenue. These trustees are commonly called "pensioneer trustees". A prime function of a pensioneer trustee is to make sure that a pension scheme is wound up only in accordance with the terms of its governing documents. A pensioneer trustee is not normally liable to the special tax charge.

Social Security Contributions (Share Options) Act 2001

Those companies that wished to settle the Class 1 NICs on options granted to employees between 6 April 1999 and 19 May 2000 were required to make notification and payment under the above Act by the 10 August 2001.

The Act contains special provisions concerning the rollover of options which are settled under the Act. Guidance on the rollover provisions contained within the Act can be found on the Inland Revenue website at www.inlandrevenue.gov.uk/shareschemes/index.htm

Revenue Prosecutions

The Inland Revenue has a policy of selective prosecution involving the most serious cases across the whole range of the tax system. The Board see this as an important part of its strategy to deter tax fraud and evasion. As part of the wider publicity for this strategy, details of Revenue prosecutions are occasionally published in Tax Bulletin.

Tax Fraud Confiscation Order

John (Jim) Foggon

Mr Foggon was made a subject of a confiscation order of £1,068,441 at Manchester Crown Court.

The order was unprecedented in that it reflected the total amount that Mr Foggon had benefited from by diverting the money to his TSB account rather then simply the amount of tax and interest evaded.

In default of Payment Mr Foggon will serve a further 6 years in prison.

Mr John Foggon had previously pleaded guilty to defrauding the Inland Revenue over a number of years by diverting in excess of £1 million of company money into a hidden bank account. He was jailed for 2 years on 11 May 2001.

The Inland Revenue is committed to ensuring that people pay the right amount of tax at the right time. Anyone who operates a bank account in a similar way to Mr Foggon or understates profits or income by any other means should make an early disclosure to the Inland Revenue.Taxpayers who make a voluntary disclosure by coming forward before an investigation starts can normally expect to settle with the Inland Revenue for tax, interest and penalties. The amount that has to be paid by someone who comes forward voluntarily is usually considerably less than the amount payable under a confiscation order, which is almost always sought in prosecution cases. In Mr Foggon’s case the confiscation order was over double the tax and interest due.

Couple Found Guilty of Cheating the Inland Revenue

John Clapton, aged 60 and his wife Sarah Clapton, aged 53, were sentenced at Kingston Crown Court on Monday 10 September. Both had pleaded guilty to cheating the Inland Revenue by failing to declare the full extent of their incomes as tour guides and from the letting of properties in the UK and Australia.

John Clapton was sentenced to two years imprisonment and Sarah Clapton was made the subject of a one hundred-hour community service order.

The combined tax loss as calculated by the Inland Revenue is estimated at £855,573. This is based on £609,812.67 in respect of John Clapton and £244,761.54 for Sarah Clapton. The offences cover the periods from 1981 to 2000 for John Clapton and 1985 to 2000 for Sarah Clapton.

In passing sentence on John Clapton, His Honour Judge Hucker said:

" This matter was undoubtedly a scheme of evasion, not simply not paying tax. The fact that a full and frank disclosure could have been made and was considered makes little difference. It is clear to me that you realised that the noose was closing and you were deciding how to deal with it; only a custodial sentence will do".

Judge Hucker added that in sentencing he had taken into account the guilty plea, the probable loss of property following confiscation proceedings, likely costs of £50,000 and the fact that he would be able to pay the full amount of the tax due.

In passing sentence on Sarah Clapton, His Honour Judge Hucker said

" I do take the view put forward that you were a partner in this criminal activity, but a junior partner. You did close your eyes and knew what was going on but you were concentrating on bringing up a young family. Because of these factors you have been dealt with by way of a community service order. Because you have been responsible for bringing up two growing children the community service order has been kept to the minimum. The difference in sentencing is in respect of responsibility."

There will be a hearing to deal with the confiscation proceedings.

Unqualified Accountant Sentenced to 12 Months for Cheating the Inland Revenue

Colin Weaver aged 50 was sentenced at Birmingham Crown Court on Tuesday 30 October 2001. Christopher Corrigan, a subcontractor in the Construction Industry had employed his then next door neighbour Mr Weaver as his unqualified accountant. Mr Weaver admitted that for the two accounting years 1994 and 1995 he prepared false accounts that included alleged payments to a limited company that had not in fact been made. He further admitted that he was the sole director of the limited company and that he and Mr Corrigan had falsified the payments to reduce Mr Corrigans tax liability. On 19 January 2001 Mr Weaver pleaded guilty and Mr Corrigan pleaded not guilty. At the trial, which started on the 17 September 2001, Mr Weaver was the main witness for the Inland Revenue. At the conclusion of the trial the jury took just 30 minutes to find Mr Corrigan not guilty.Colin Weaver was sentenced to 12 months imprisonment. The combined tax loss as calculated by the Inland Revenue is £110,000.

Correction

In Tax Bulletin Issue 55 (October 2001 at page 887) in the opening paragraph of the second article entitled "The Late Notification Penalty" we said that "This article supersedes the article published in Tax Bulletin Issue 54 (August 2001) at page 868. This was incorrect and should have read " This article supersedes the article published in Tax Bulletin Issue 53 (June 2001) at page 849.

Please amend your copies accordingly and accept our apologies for any inconvenience this may have caused you.

Inland Revenue Statements of Practice and Extra-Statutory Concessions issued between 1 Ocober 2001 and 30 November 2001.

Extra Statutory Concessions

Number Title Date of Issue
A102 Contributions to approved personal pension plans from 6 April 2001 under Section 639 ICTA 1988 and age related Allowances 19/10/01
F20 Late Compensation for World War 11 claims (amended) 16/10/01

Statements of Practice

There have been no Statements of Practice issued in this period.

You can get copies of SPs and ESCs by ringing 020 7438 4266.

Content

The content of Tax Bulletin gives the views of our technical specialists on particular issues. The information published is reported because it may be of interest to tax practitioners. Publication will be six times a year, and include a cumulative index issued on an annual basis.

  • You can expect that interpretations of the law contained in the Bulletin will normally be applied in relevant cases, but this is subject to a number of qualifications.
  • Particular cases may turn on their own facts, or context, and because every possible situation cannot be covered, there may be circumstances in which the interpretation given here will not apply.
  • There may also be circumstances in which the Board would find it necessary to argue for a different interpretation in appeal proceedings.
  • The Bulletin does not replace formal Statements of Practice.
  • The Board’s view of the law may change in the future. Readers will be notified of any changes in future editions.

Nothing in this Bulletin affects a taxpayer’s right of appeal on any point.

Letters on any article appearing in Tax Bulletin should be sent to the Editor, Julia Hawkes, Room S18, West Wing, Somerset House, Strand, London, WC2R 1LB or e-mail Julia.Hawkes@ir.gsi.gov.uk. We are sorry though that neither she nor our contributors will normally be able to enter into correspondence about Tax Bulletin or its contents.

Subscription

The subscription for 2001 is £22. If you would like to subscribe to Tax Bulletin please send your name and address together with your cheque to Inland Revenue, Finance Division, Barrington Road, Worthing, West Sussex BN12 4XH. Cheques should be crossed and made payable to "Inland Revenue".

If you would like information regarding Tax Bulletin subscription or distribution please contact Mr Bryan Kearney, Room S15, West Wing, Somerset House, Strand, London, WC2R 1LB. Telephone: 020 7438 6373. For more general information regarding Tax Bulletin, please contact Ms Nahid Shariff, Assistant Editor, on 020 7438 7842 or at the address below.

Copyright

Tax Bulletin is covered by Crown Copyright. There is no objection to firms copying the Bulletin for their own use. Anyone wishing to republish Tax Bulletin or extracts more widely should write for permission to Ms Nahid Shariff, Assistant Editor, Room S15, West Wing, Somerset House, Strand, London, WC2R 1LB.

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