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Thursday, 25th April 2024 |
| Financial service matters dominated the relatively sparse tax content of Gordon Brown’s tenth budget. His vision for the future of the UK should be of interest in Ireland, writes Eamonn Donaghy, tax partner, KPMG. |
Leasing Changes
Britain’s new tax regime for nonlong- funding leases of plant and machinery is being introduced with effect for leases entered into on or after 1st April 2006. It is subject to complex grandfathering and transitional provisions. Broadly, a leasing company can elect to be taxed on a basis that would closely approximate to accounting profit from its leases, in respect of leases of plant and machinery for in excess of five years, and whose cost does not exceed stg. ?10 million. The leasing company would no longer be taxed on the basis of treating as income the entire lease rental payments, and then claiming a deduction for capital allowances. Instead, in the case where the lessor has made the election, the lessee will be entitled to capital allowances and to a deduction, not for the full lease rental payment but only for the interest element. The practical implication is that the benefit of a front-loaded deduction, which is what capital allowances represents in the case of longer life plant, moves from the lessor to the lessee. The regime is not mandatory. Lessors will also have the option to elect for leases which are not long funding leases, other than leases of cars, to be taxed under the new regime as long as the value of each of the leased assets does not exceed ?10m.
Anti-avoidance measures have been introduced to counter the sale of leasing companies to loss-making groups. There are existing rules which make it very difficult to ‘buy a loss company’ but leasing companies whose capital allowance position was reversing so that they were facing substantial tax charges could take advantage of losses in other groups, if the leasing company were sold to those other groups.
Property Sector
The Finance Act will make provision for the tax treatment of Real Estate Investment Trusts (REIT). These will be close-ended quoted companies resident in the UK. The REIT must derive at least 75 per cent of its total profits from property-letting business, and at least 75 per cent of the total value of the assets held by the REIT must be held in that business. However, the REIT will be tax exempt as regards its capital gains and rental income. It will be obliged to distribute at least 90 per cent of the tax exempt profits at least by six months after the end of an accounting period. The distributions will be subject to withholding tax at the basic tax rate of 22 per cent. This will be creditable against the tax liability of the recipients who will be deemed to be in receipt of property income (irrespective of the source of the distribution). No shareholder may have a holding of greater than 10 per cent. There is a gearing limit. There will be a 2 per cent entry charge based on the market value of the property held by an existing company wishing to become a REIT.
Although the REIT might seem similar in some respects to a gross fund in Ireland, it is in truth fundamentally different and is more in the nature of a tax transparent vehicle, with tax arising at the level of the individual shareholder broadly as income and gains arise within the fund. It is not a tax driven vehicle and is at best, tax neutral. It is unlikely to be attractive from a tax view point for investors in Ireland since it would not seem to qualify as an off-shore fund.
There is a strong danger that distributions from the REIT would be regarded as income in the hands of an Irish resident investor, even where source of the distribution is a capital gain. Prima facie, an Irish investor will be taxable at the marginable tax rate on distributions. It remains to be seen if the Revenue Commissioners in Ireland will be open to persuasion that a distribution out of a capital gain made by a REIT should receive capital gains tax treatment in the hands of an Irish investor.
Securitisation Vehicles
The temporary tax regime for these companies has been extended for a further year, until 31st December 2007. This enables the securitisation company to be taxed on the basis of accounting standards in force before the introduction of international accounting standards (IFRS, etc). This parallels the treatment in Ireland, where Section 110 companies are taxed on the basis of accounting standards as they applied on 31st December 2004.
Capital Allowances
Small businesses have had the first year rate of capital allowances on plant and machinery increased, for a period of one year, from 40 per cent to 50 per cent. Small businesses in Ireland do not receive similar extra relief. Especially in the start-up period of a business, front-loaded capital allowances can have an important impact on cash flow.
Films
A new film tax regime has been introduced from 1st April 2006 for film production companies, but not for individuals or partnerships. It involves an additional deduction of 80 per cent of production expenditure, where the expenditure exceeds stg. ?20 million; and an additional deduction of 100 per cent of the expenditure where the expenditure is less than stg. ?20 million.
Where the additional deduction gives rise to a loss, this can be ‘cashed in’ at a rate of 25 per cent for low budget films, and 20 per cent for high budget films. The qualifying threshold for UK expenditure on the film has been set at 25 per cent and the additional deduction for expenditure, and the repayable tax credit, is limited to that part of the expenditure which is incurred in the UK, which cannot exceed 80 per cent of total expenditure.
The new regime is subject to final EU State Aid approval. Full details are not yet published. Notwithstanding that the entire arrangement is part of the tax code applying to film production companies, the repayable credit in respect of losses makes it similar to a straightforward cash grant.
Film relief in Ireland was also liberalised in the Finance Act 2006. A company may now receive a deduction of up to 80 per cent of its investment in a film project, subject to an overall expenditure of €35 million. However, there is no question of a repayable tax credit.
Adding Research & Development
The UK has a twin track tax relief for research and development expenditure, with enhanced relief available to SMEs. The threshold for qualifying for an SME has been increased from companies with 250 employees to those with 500 employees. The scheme has also been amended by including clinical trial costs in qualifying expenditure.
In recent times, little has been heard of the research and development tax relief in Ireland. Anecdotal evidence suggests that it is something of a flop, as was predicted due to the fact that it focuses solely on incremental expenditure rather than total expenditure.
Cross Border Relief
The Chancellor has responded to the Marks & Spencer judgement of the ECJ with the introduction of the minimum amount of relief that the ECJ required, i.e., relief in the UK for losses of overseas subsidiaries only where it had become definitively impossible to get relief for those losses elsewhere. There will also be rules dealing with the situation where the loss-making subsidiary is owned through a holding company in another Member State. Relief will be limited to the lower of the loss computed according to UK tax principles, and those computed by the tax principles of the foreign country in which the loss-making subsidiary is resident. There will also be anti-avoidance measures. There is already some speculation that the UK’s response to the ECJ judgement could itself become the subject matter of another case before the ECJ!
Anti-avoidance
A range of tax planning measures has been legislated against. These include tax planning concerning the demutualization of life assurance companies; planning centring on stock-lending arrangements; buying and selling rights to dividends; various instruments used to take advantage of the UK’s ‘loan relationship’ rules including exploitation of different accounting rules as between group companies making intragroup transfers; the foreign exchange rules on ‘contrived hedging arrangements’ where, had there been an exchange profit, the profit would not have been taxable and the provision of a non-taxable return to the person connected with a lender who lends at less than full commercial lending rates. Many of these matters were the subject of disclosures to the UK Revenue under the mandatory disclosure of tax plans.
Sharia Banking
The UK has made further progress in rendering its tax rules ‘Sharia-friendly’. Economically, Islamic banking is becoming of increasing significance. Three new forms of Islamic financing have been focused on so as to ensure that the tax treatment that they receive is no more and no less favourable than the tax treatment that would apply to the alternative conventional form of finance. These include straightforward loans at interest; loans by employers to employees; and the equivalent of bank deposits.
Unfortunately, Ireland has not seen fit to review its tax rules so as to ensure that Islamic banking is not unnecessarily penalised. The issue is not confined to the provision of retail products for the local Islamic community. It has relevance also to international finance, something that should claim the attention of Ireland’s international financial services industry.
The Future
Gordon Brown’s budget may have been low on tax detail, but was high on the ‘vision factor’. Many of his aspirations for the UK are ones that the Minister for Finance in Ireland would do well to ponder. They include the following:
- ‘No Return to Boom & Bust’
- ‘The public sector pay settlements will show settlements averaging just to within 2.5 per cent.’
- ‘Britain can lead in some of the fastest growing and highest value added sectors – city and business services, education and health, creative and science-based industries.’
- ‘Falling behind in science and mathematics means falling behind in commerce and prosperity.’
- ‘With the aim of trebling our education exports, soon ?50 billion of our economy, we are signing new education partnerships - and to make Britain more attractive for overseas students - we will make it easier for those with specialist skills who graduate from English universities to work here for one year.’
- ‘I will refocus tax incentives for venture capital, with a 30 per cent relief for investments in venture capital trusts.’
- ‘I announce the formation of a national enterprise network of over 200 schools, new summer schools in enterprise, including scholarships to American universities for young British entrepreneurs.’
- ‘Our second ambition is for Britain to be a world leader in the discovery and development of new energy technologies.’
- ‘To release new resources for our priorities – central to which is building world-class schools and education – we are reviewing the use of assets in all areas.’
- ‘Published today are the figures for the first stg. ?6.4 billion of savings, including a reduction in civil service posts of 40,000.’
This is something of a contrast to Ireland, where public pay settlements seem to have no limits, the teaching of science and mathematics is hardly popular, the huge education sector is mired in uncompetitive State control and shows little prospect of becoming a major export orientated
industry; and entrepreneurship seems more of a ‘dirty word’ than a quality to be taught in schools. Who was the last Minister to boast of cutting civil servant jobs? In Ireland we are concerned only with multiplying them and relocating them.
Perhaps we could still learn something from the UK. |
Eamonn Donaghy is a tax partner at KPMG.
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| Article appeared in the May 2006 issue.
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