Inland Revenue Tax Bulletin - Issue 51


Contents

Interpretations

Miscellaneous

Providing services through an intermediary - IR35 - what happens next?

The IR35 legislation has been in force since 6 April 2000. Although much of the public interest has related to workers in the IT and engineering industries, it could affect people in any industry who use a limited company or partnership to provide their services to others.

Advisers with clients who may be affected will need to take action before the end of the tax year. This article explains who is affected and what you need to consider before 5 April.

This article is not intended to provide a detailed analysis of the legislation, which is contained in Schedule 12 Finance Act 2000 and the Social Security Contributions (Intermediaries) Regulations 2000. Copies of this legislation and all of the other documents and publications referred to in this article can be accessed through the Inland Revenue's web site at www.inlandrevenue.gov.uk/ir35.

Who does IR35 affect?

There is a common misconception that IR35 only applies to people working in the IT sector. This is not correct. The legislation is not targeted at any particular occupation or business sector. It can apply in any business sector where:

  • an individual (known as a worker) provides services to another person (known as the client);
  • under arrangements involving an intermediary (such as a company or a partnership);
  • in circumstances such that if the contract had been made directly then the worker would have been an employee of the client.

Anyone who structures their working arrangements in this way could be affected by the legislation. Examples of occupations where people work through service companies run right across the board, including medical staff, chief executives of large plc's, legal and accountancy staff, construction industry workers, clerical workers, press officers, night club bouncers and many others.

Advisers need to be aware that IR35 can apply to anyone working through an intermediary, regardless of occupation. If they are giving advice to those working in this way they need to decide whether their clients are affected by the legislation and find out what action they need to take over the coming months.

The intermediary is normally a limited company, commonly referred to as a service company. However, a partnership could also be an intermediary. The vast majority of intermediaries are companies so this article is aimed principally at how the legislation applies to companies. There are, however, some differences in the treatment of partnerships and further guidance on these aspects can be found in the Inland Revenue's Employment Status Manual at ESM3000 onwards.

How do I know if the legislation applies in a particular case?

We have already produced a lot of information to help people decide whether the legislation applies in a particular case. These include:

The Inland Revenue has also undertaken to give opinions on whether a particular contract would have been considered to be employment or self-employment. Where someone is in doubt about whether an engagement would have been employment or self- employment, then he or she may ask us for an opinion. Our opinion will be based upon the existing case law tests for determining employment status. An opinion will only be given on contracts that are in force and not on draft agreements.

The opinion is given in accordance with the Revenue's overall commitment under Code of Practice 10. It does not of itself create a decision subject to appeal. Taxpayers are entitled to rely on our opinion in completing tax returns (including the intermediary's P35 and related documentation) provided that the information given to enable us to reach that opinion is complete and correctly reflects the true relationship. They are also at liberty to adopt their own alternative view in completing those returns and, if we cannot reach agreement, can ask us for a formal NICs decision against which there is a right of appeal to the General or Special Commissioners.

The Inland Revenue will take account of the circumstances in which the services are provided, including all of the contracts forming part of the overall arrangements in order to decide whether the relationship between the worker and the client would have been one of employment, if there had been no intermediary. This will include any contracts between the client and an agency and between the agency and a worker's service company.

Procedure for obtaining an opinion

If you want the Inland Revenue to give an opinion then we will need to establish the facts relating to the engagement and will need to see copies of any contracts involved in the relationship. You should send us copies of these contracts when asking for an opinion together with any other information that you consider might be relevant.

You should send the contracts to:

LP10 (address shown here)

Fax: 0845-302-3535

You should also provide the worker's National Insurance number, the company's Inland Revenue reference number and the company's postcode. Workers in the TV and Radio field should put 'TV' instead of the postcode. Workers in the film industry should replace postcode with 'FILM'.

We will often not be able to give you an opinion based solely on the contracts and may have to ask you for further information about the working relationship. This may mean that we will have to speak to the worker and to someone representing the client. Therefore, when submitting any contract for consideration please let us have details of someone who can speak on behalf of the client, whom we can contact and also details of how we can speak to the worker.

It would also help us to provide an opinion as quickly as possible if you enclose any other information relevant to the particular engagement when submitting the contract. This might include, but not be limited to:

  • details of how the engagement was obtained and the recruitment procedure together with a copy of any adverts for the work in question;
  • a description of the nature of the services to be performed together with any job or work specifications for the contract;
  • copies of any tenders made by the intermediary;
  • details of any additional contractual terms not included within the written contracts, whether oral, written or implied;
  • details of how and who allocates the work and the role the worker plays in the client's organisation i.e. does he/she work alone or as part of a team.

Further guidance on the Revenue's views on employment status and the intermediaries legislation can be found in the February 2000 Tax Bulletin and in the Employment Status Manual.

What happens when the legislation applies?

When the legislation applies, then tax and NICs must be paid on a minimum amount of salary. This may be either in the form of actual payments during the year or as a notional payment deemed to have been paid to the worker by the intermediary. This deemed payment is usually treated as made on the last day of the tax year, although it is accelerated in certain situations, such as when an individual leaves the service company, see Specific points at the end of this article.

In broad terms the effect of the IR35 rules is as follows:

  • the client - is not affected and continues to make gross payments to the service company as before;
  • the service company - is treated as making a payment to the worker which is taxable under Schedule E and subject to Class 1 NICs. For NICs purposes, the service company is treated as the secondary contributor. The company's corporation tax position is not affected other than that it will obtain a deduction for the deemed payment and associated secondary NICs;
  • the worker - is treated as receiving a payment chargeable to income tax under Schedule E (with a credit for tax deducted under PAYE) and subject to PAYE and to Class 1 NICs from the service company. For NICs purposes, the worker is treated as an employed earner of the service company.

Example

Mr Adams is a draughtsman. He negotiates a contract with Client plc. Under this contract, which will last for 12 months starting on 1 May 2000, he is engaged on terms and conditions that would make him an employee of Client plc if taken on directly. However, the agreement for the supply of Mr Adams' services is made between Client plc and Mr Adams' company, Adams Services Ltd, in which he owns all of the shares. There is no contract between Mr Adams and Client plc.

All of the income from the contract with Client plc will be covered by the intermediaries legislation.

  • Mr Adams (the worker) is under an obligation to personally perform services for the purposes of a business carried on by another person, Client plc (the client);
  • the services are provided not under a contract directly between the client and the worker but under arrangements involving a third party, Adams Services Ltd (the intermediary);
  • if the services had been provided under a contract directly between Mr Adams and Client plc, he would be regarded as an employee of the client for tax and NICs purposes;
  • the work done under the contract starts on or after 6th April 2000.

In addition:

  • Mr Adams owns shares in the intermediary and is entitled to receive dividends from the company. He therefore has rights entitling him to receive a payment from the intermediary that is not chargeable to tax under Schedule E.
  • Mr Adams owns all of the shares in the intermediary. He therefore has a material interest in the intermediary and thus the conditions of liability where the intermediary is a company are satisfied.

Therefore a deemed Schedule E payment will be treated as paid.

What do advisers have to do before the end of the tax year?

The first step will be to work out which, if any, of the engagements undertaken by the service company will be caught by the IR35 rules. Assuming some are caught, there will only be a deemed payment if a minimum amount of salary and secondary NICs has not been paid. If you want to avoid having a deemed payment, you therefore need to work out how much salary needs to be paid. This means you need to know what the income for the tax year is likely to be and what the allowable deductions are. Note that these are both on a cash, and not an accruals, basis. Also, a deduction will only be given for the amount of salary actually paid during the tax year, so your client needs to make arrangements for this before it is too late, if he wishes to avoid having to pay tax and NICs on a deemed payment.

Action to take before the end of the tax year

If you have any clients whom you think could be affected you need to:

  • decide whether the client is affected by the legislation;
  • find out what the income and allowable expenditure for the year is likely to be;
  • work out how much salary the company needs to pay the worker, if you wish to avoid a deemed payment;
  • ensure the salary is paid before the end of the tax year if a deduction is to be given in the deemed payment calculation for that year.

Provided the calculation of the minimum amount of salary to pay is reasonably accurate then any deemed payment is likely to be nil, or no more than a small balancing amount.

If the minimum amount of salary and NICs is not paid then there will be a deemed payment. In this event you will need to work out the amount of that deemed payment and the secondary NICs and ensure this is included on the relevant returns and paid to the Inland Revenue. Detailed guidance on the deemed payment calculation is provided at the end of this article.

What does the service company have to do at the end of the tax year?

The legislation requires a calculation of tax and NICs to be made, normally, on 5 April. If the intermediary has already paid enough salary to the worker during the year, no further tax or NICs will be payable.

If there is a deemed payment this simply means that an extra payment of PAYE tax and NICs has to be calculated and accounted for. To calculate that payment, an amount of salary is deemed to have been paid, whether or not any payment is actually made.

If the company is treated as making a deemed payment then the legislation ensures that the net amount of money remaining after PAYE and employer's NICs can be paid out as dividends, up to the amount of that deemed payment, without further tax or NICs becoming due. The dividends can be paid during the same tax year as the deemed payment or in a subsequent year. The dividends can be paid to someone other than the worker.

If money, which has been included in the calculation of a deemed payment is paid out by the company after the end of the tax year, it will often be advantageous to pay it in the form of a dividend, and take advantage of this provision, rather than in the form of a salary, see Specific points below.

The service company that has been treated as making a deemed payment makes the claim to effect that the dividend is treated as non-taxable in the hands of the recipient. Once the claim has been accepted the dividend does not have to be returned on the recipient's self-assessment.

How to make a claim

The company should make any claim to its own Inland Revenue office and tell us about any dividends it has paid which it wants to be exempted. We will need the following information:

  • the name and tax reference of the company making the claim;
  • the name(s) and tax reference(s) of the person(s) who received the dividend;
  • the amount of the dividend paid to each person and the total amount paid;
  • the date the dividend was paid;
  • the amount of the deemed payment and date on which it was treated as paid.

How do you account for the deemed payment and secondary NICs?

The deemed payment and any tax and NICs due on it should be entered in the normal way on the deductions working sheet. The Employers Further Guide to PAYE (CWG2) explains how to work out PAYE and NICs. This guide is in PDF format. To view a PDF document you must have Adobe Acrobat Reader installed on your computer. If you require this material converting to large print or Braille please contact your local HMRC office, or enquiry centre; for paper material contact your ordering service.

For NICs purposes only:

  • the amount of the deemed payment should be aggregated with any other earnings derived from employed earner's employment (in effect, any salary paid in-year by the service company to the worker, but not drawings from a partnership); and
  • the amount of Class 1 NICs calculated on that aggregate amount using an annual earnings period, whether or not the worker is a director of a company during the year.

Any tax and NICs due at the end of a year as a result of the calculation of the deemed payment should be sent to the collector by 19 April following the end of the tax year in which the deemed payment arises, along with any other tax and NICs due to be paid at that date.

The deemed payment and the tax and NICs due on it should be included in the totals of pay, tax and NICs in the end of year PAYE returns (forms P35 and P14) which should be sent to us by 19 May. Any tax and NICs due on the deemed payment do not have to be identified separately from any other pay, tax and NICs included in the end of year forms. On the P35, the tax and the NICs can simply be included in the total tax and total NICs boxes. But there is a question to answer at box 6 of the checklist on the front of form P35 to tell us whether or not PAYE and NICs on a deemed payment are included in the total figures.

If you are unable to complete the deemed payment calculation by 19 April we will accept a payment on account at that date of the tax and NICs due on the deemed payment. However, the company will need to tell us in a note accompanying the form P35 by 19 May that the amount paid on 19 April and reflected in the end of year forms sent in by 19 May is provisional.

Interest will be due in the normal way on any of the tax or NICs due on the deemed payment that is not paid to us by 19 April. But, as long as the company tells us by 19 May that the figures are provisional, no penalties will be charged, provided it sends us a correction to the form P35 and P14 figures by the following 31 January and pays any balance of tax and NICs due in respect of the deemed payment by that date. The company will also need to issue a corrected P60 to the employee.This procedure will apply for the tax year 2000-01 and will be reviewed to establish whether it should continue to apply for subsequent years.

What figures are recorded on the worker's self assessment return?

The deemed payment is treated as income from employment with the company, and the tax is treated in exactly the same way as other PAYE tax.

The pay and tax details should therefore be recorded on the Self Assessment (SA) return on the supplementary employment page relating to the worker's work through the company. But as the pay and tax details on the P60 given to the worker by the company should include the deemed payment and the tax, there is no need to enter the figures separately on the employment page. Simply enter the total P60 pay and tax figures in the relevant boxes. If, however, only a provisional amount of tax had been paid by the time P60 was issued, the worker may receive a revised one when the correct deemed payment is calculated and tax accounted for. In such a case, use the pay and tax figures on the revised P60.

How are the company's tax computations affected?

The company may deduct the whole of the deemed payment and any employer's NICs due on it in calculating its corporation tax liability. The deemed payment includes the primary employee's NICs, PAYE tax and the net amount remaining after the tax and NICs have been deducted. There is no need for the net amount to be paid out to the worker either as salary or dividend for a corporation tax deduction to be claimed. However, no other deductions are allowed for these amounts and if anything has already been claimed through the accounts an appropriate adjustment must be made.

This deduction is only allowable in calculating the taxable profits for the accounting period in which the deemed payment is treated as paid.

The deemed payment is normally treated as paid at the end of the tax year. However, companies are taxed on an accounts basis and can choose which date to make their accounts up to. Advisers will need to consider which is the best accounting date for their client since this will determine when relief is given for the deemed payment. Significant differences can arise where different accounting dates are used.

However, the timing of the accounting date is not likely to be material if the company pays the worker sufficient salary during the tax year so that there is no, or only a small, deemed payment.

Examples of the consequences of using different accounting dates

Example 1

Locost Services Ltd makes up its accounts to 31 March. In the year ending 31 March 2001 it earned £50,000 supplying the services of Mary Brown. All of these engagements during the accounting period are within the IR35 rules.

The company had a taxable profit of £45,000. Locost is treated as making a deemed payment of £40,000 with associated secondary NICs of £4,454 on 5 April 2001.

The deemed payment is treated as paid during Locost's accounting period ending 31 March 2002. Therefore Locost's corporation tax profits for the year ending 31 March 2001 will remain as £45,000. Mary Brown will be treated as receiving a taxable payment of £40,000 on 5 April 2001.

Example 2

Swift Services Ltd makes up its accounts to 30 April. In the year ending 30 April 2001 it earned £50,000 supplying the services of Michael Green. All of these engagements during the accounting period are within the IR35 rules.

The company had a taxable profit of £45,000. Swift is treated as making a deemed payment of £40,000 with associated secondary NICs of £4,454 on 5 April 2001.

The deemed payment is treated as paid during Swift's accounting period ending 30 April 2001. Therefore Swift's corporation tax profits for the year ending 30 April 2001 are reduced to £546. Michael Green is treated as receiving a taxable payment of £40,000 on 5 April 2001.

Specific points

What if the money is paid as a salary after the end of the tax year, rather than as dividends?

Any money paid as salary will be subject to the normal PAYE and NICs rules, whenever that salary is paid. The legislation only provides for a dividend to be paid without further tax liability.

Any salary paid in a later year will reduce the amount of the deemed payment in the tax year in which it is paid. It cannot be used to frank a deemed payment in an earlier or subsequent tax year.

More tax and NICs may be paid than is needed, if the company pays a salary after the end of a tax year in which tax has been paid on a deemed payment, and the salary in the later year is more than the amount the company receives from engagements covered by the legislation, after deductions. In these circumstances it may be more advantageous for the company to pay a dividend, rather than salary.

What if the worker stops working through the service company or partnership before the end of the year (an in-year event)?

The deemed payment is normally treated as made on 5 April. However, it is treated as made at an earlier date when one of the following events occurs:

Where the intermediary is a company:

  • the worker disposes of his/her shares in the company;
  • the worker ceases to hold office with the company;
  • the worker ceases to be employed by the company.

Where the intermediary is a partnership:

  • the partnership is dissolved or ceases to trade;
  • the partner ceases to act as such or ceases to be employed by the partnership.

Where one, or more, of these events occur the deemed payment is treated as being made at the date of the earliest of the events.

It is important to be aware that where the intermediary is a company the cessation of trade does not mean a deemed payment is treated as paid on that date unless one of the other events occurs at the same time. However, where someone working through their service company continues to work for the company as an employee or a director the Revenue will not normally seek to argue for this purpose that the trade has ceased at an earlier date.

Where there is an in year event, the intermediary will need to calculate the deemed payment at that time and arrange for any tax and national insurance contributions to be paid to the Revenue in the normal way, as for any payment of salary. The form P45 should also be completed in the usual way.

What happens if the service company's income has tax deducted under the Construction Industry Scheme (CIS)?

The deemed payment is based upon the amount the company receives from the engagement. However, where the company receives monies from which tax at the current rate of 18% has been deducted under the CIS, the gross amount before deduction of the 18% tax is the amount to be used in the deemed payment calculation. The CIS deduction is a payment on account of the corporation tax due. It is not therefore available for offset against the liability in respect of the deemed payment and secondary NICs. If the company has no corporation tax liability, submission of the accounts and tax return promptly after the end of the tax year will enable the Revenue to make any repayment that is due at an early date.

What is happening about the Judicial Review of the legislation being brought by the Professional Contractors Group and others?

The Professional Contractors Group has been given permission by the Administrative Court to proceed to a full hearing of their case. The Government is confident that at the full hearing, the Court will decide that the legislation is fair, proportionate, and compatible with all the UK's obligations under EU law. We expect the full hearing to take place in March 2001.

Further information

Further guidance and information about the IR35 legislation can be obtained from the following sources:

Appendix 1

The deemed payment is based upon the income from relevant engagements less certain deductions. It is calculated as follows:

Step One

The starting point for working out the deemed payment is the amount received by the intermediary in the tax year in respect of engagements to which the legislation applies. This includes any non-cash benefits.

Non-cash benefits might include things like the provision of living accommodation, the use of an asset such as a car, gifts of assets, and any other benefit or facility provided by the client. Further guidance about benefits can be found in Booklet 480: Expenses and Benefits - a tax guide. This guide is in PDF format. To view a PDF document you must have Adobe Acrobat Reader installed on your computer. If you require this material converting to large print or Braille please contact your local HMRC office, or enquiry centre; for paper material contact your ordering service.

From this amount a flat rate 5% is deducted, to cover other unspecified expenses, such as running costs of the intermediary.

This deduction is given automatically, but only affects the calculation of the deemed payment. You cannot deduct it when you are working out the taxable profits of the company or partnership.

Step Two

Add any payments or benefits received by the worker, or his family, in respect of the relevant engagements from anyone other than the intermediary which are not otherwise chargeable to income tax under Schedule E but would be if the worker were employed by the client.

Step Three

Deduct any expenses met by the intermediary, which could have been claimed as expenses against income tax if the worker had been an employee of the client and had paid for them himself.

Employees are only allowed to deduct expenses which are wholly, exclusively and necessarily incurred in the performance of their duties. These will not include some common items which are deductible in company accounts.

For example, where a spouse is employed by the intermediary to carry out administrative work for the company it is unlikely that his or her wages will be allowed when working out the deemed payment. This is because an employee would not have been allowed to deduct those wages when working out his or her taxable earnings from employment.

The worker may, however, be able to claim for:

  • travel and related meal and accommodation costs incurred in doing the job or in travelling to a temporary workplace he or she had to attend to perform the job, and
  • other necessary expenses incurred solely in doing the job.

Further guidance about what expenses may be claimed can be found in Booklet 480: Expenses and Benefits - a tax guide and Booklet 490: Employee Travel - a tax and NICs guide for employees. These guides are in PDF format. To view a PDF document you must have Adobe Acrobat Reader installed on your computer. If you require this material converting to large print or Braille please contact your local HMRC office, or enquiry centre; for paper material contact your ordering service.

Any such deduction made in working out the deemed payment does not affect the expenses that can be deducted in the company or partnership accounts.

Step Four

Deduct any capital allowances in respect of expenditure incurred by the intermediary that the worker could have claimed if employed by the client and he or she had incurred the expenditure.

Equipment or machinery is regarded as necessary if the worker could not do the job without it. The equipment and machinery must be things that each and every person doing that job would have to provide.

For example, an intermediary may own computer equipment. However, the client provides all of the equipment necessary to complete the job and the worker only uses the intermediary's equipment out of choice. In this case capital allowances will not be allowed for the intermediary's equipment.

The 'necessary' test does not apply for cars, motor bikes and bicycles. Therefore, it may be possible to claim capital allowances for a car, motorbike or bicycle that was used for work or in travelling to a temporary workplace the worker had to attend to perform the job.

Further guidance about claiming capital allowances can be found in Leaflet IR125: Using your own car or motor bike for work and in Helpsheet IR206 - Capital allowances for employees and office holders.

Any such capital allowances claimed in working out the deemed payment do not affect the capital allowances that can be deducted in the company or partnership accounts.

Step Five

Deduct any contributions to an approved pension scheme by the company for the benefit of the worker in the year.

Step Six

Deduct any employer's Class 1 and Class 1A NICs paid by the intermediary for that year in respect of salary or benefits in kind provided to the worker during the year.

The NICs should be calculated on an annual basis, whether or not the worker is a director of the company (see CWG1 'Employer's Quick Guide to Pay As You Earn and National Insurance Contributions', Card 12 Company Directors - National Insurance Contributions.)

Step Seven

Deduct the amount of any salary and benefits in kind received during the same tax year by the worker from the intermediary which are already taxable under Schedule E. This does not include anything for which a deduction has already been given at Step Three. If the figure reached at Step Seven is nil or a negative number, then there is no deemed payment and no further tax or NICs are payable. If the result is positive, move on to Step Eight.

Step Eight

Deduct the amount of the Employer's NICs on the deemed payment. It is therefore necessary to calculate the amount, which, together with the employer's NICs on it, equals the result of Step Seven.

Step Nine

The amount that you are left with is the deemed payment on which tax and NICs are payable.

Examples of deemed payment calculations can be found on the Inland Revenue website at www.inlandrevenue.gov.uk/ir35

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(No longer relevant)
The deadline for surcharge on late paid tax under income tax self assessment

We are changing slightly our approach to surcharging 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).

In the typical case of a return issued on or before 31 October following the end of the year of assessment, the due date will be 31 January following the year of assessment. The expiry of the 28 days will then take place at the end of 28 February. Our published view is that surcharge applies if any tax remains unpaid at any time on the 29th day, that is 1 March or 29 February in a leap year.

But on a number of recent occasions it has been argued against us that 'remains unpaid on the day' means throughout the 29th day and that therefore tax paid on that day does not attract the surcharge. This contention has succeeded before the General Commissioners. Having taken legal advice we still consider that our published view is correct. But we do accept that the matter is not free from doubt and we intend to obtain an early authoritative view from the courts to resolve the uncertainty.

In the meantime we will be relaxing our practice by one day for 2001 so that for example payments due on 31 January but received by us on 1 March will not be subject to surcharge. We will be applying similar treatment to payments that reach us on 1 August 2001. This relaxation does not apply for 2000 and earlier years. For these years we will continue to apply the practice as set out in our guidance.

Finally a note on the 'reasonable excuse' defence to the imposition of surcharge. Where payment is received late surcharge will apply unless there is a reasonable excuse throughout the period of default. Section 59C(12) defines the period of default as the period beginning with the due date and ending with the day before that on which the tax was paid. It is not, therefore, sufficient for a reasonable excuse to exist from the 29th day to the day before payment. The reasonable excuse or an unbroken series of excuses must exist from the due date (normally 31 January) to the day before the date of payment.

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Interest on Section 350 Assessments

Section 350 Income and Corporation Taxes Act 1988 (S350 ICTA 1988) assessments are issued to recover the tax on payments within Section 349(1) & (2) of ICTA 1988. Certain yearly interest, royalty or other annual payments within Section 349(1) & (2), require the person by or through whom the payment is made to deduct income tax on making the payment. The person responsible for deducting the tax is required to account for it to the Revenue and an assessment will be issued under Section 350. However, under Section 350(4), a payer who is a UK resident company uses the special procedure under Schedule 16 ICTA 1988 for making quarterly returns. This means the only payers who are assessed directly under Section 350 are non-corporates, for example local authorities, and companies resident overseas.

The requirement to account for payments caught by Section 349(1) & (2) is a "free-standing" obligation. It is separate from any SA return the payer may have to make.

Paragraph 23 of Schedule 19 Finance Act 1994 and Section 110 Finance Act 1995 significantly amended the wording of Section 86 Taxes Management Act 1970. From 6 April 1998 income tax carries interest from the relevant date until the date of payment. The relevant date is 31 January following the year of assessment regardless of the date on which the assessment is actually issued. The revised interest provisions apply to all years of assessment.

S350 assessments issued prior to 6 April 1998 did not carry any interest provisions and in error we have not charged any Section 86 interest in respect of assessments issued after this date. We now realise this is incorrect. The revised Section 86 interest provisions apply to assessments issued under S350.

Interest will therefore be charged on any S350 assessments issued after 31 January 2001 for 1999-2000 and later years, where the payment of income tax is made after the relevant date.

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Interpretation

Delaware Limited Liability Companies (DLLCs)

A number of practitioners and Representative Bodies have, over recent months, asked whether the Revenue regard US LLCs generally, and DLLCs in particular, as issuing "ordinary share capital" for the purposes of the rules in Section 838 ICTA 1988 and Sections135, 136 and 170-181 Taxation of Capital Gains Act (TCGA).

In relation to DLLCs we understand that there is legal authority for such entities to issue "shares" under

Section 18-702c of the Delaware Limited Liability Act. This provides that "a limited liability company agreement may provide that a member's interest in a limited liability company may be evidenced by a certificate of limited liability company interest issued by the limited liability company."

If a DLLC issues "shares" in this way then we will accept that these may be regarded as "ordinary share capital" for the purpose of Section 838 ICTA 1988. Consequently such an LLC may be a "75% subsidiary" for the purposes of Section 838 (1)(b) ICTA 1988. It follows that it is possible for an LLC to:

  • be a member of a capital gains group (Sections 170 to 181 TCGA)
  • be a party to share exchanges (Sections 135 to 136 TCGA), and
  • be a member of the same group as another company for the purposes of group relief (Sections 402 to 413 ICTA).

It should be noted that it is not always the case that the DLLC issues shares. Regard must be had to the particular terms of the agreement by which the LLC has been created. In any case of doubt or difficulty we will advise in particular cases in line with Code of Practice 10. The contact point is:

Ben Newton
Inland Revenue Policy
Business Tax
Group Relief and Losses
Room 97
New Wing
Somerset House
London
WC2R 1LB

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(Superseded by BIM67445)

Waste Site Prepartion Expenditure: Section 91B, ICTA 1988

Summary

The cost of engineering the base and sides of a waste disposal site to receive waste is capital expenditure, even though they may be constructed in sections that also form part of internal cells with an economic life of less than two years.

Background

Tax Bulletin Issue 34 (April 1998, page 533) looks at the question of what constitutes waste site preparation expenditure. The article details a number of the capital costs of site preparation, including engineering a site to the point where waste can be deposited. It also explains our view that the application of the capital/revenue divide to cell construction within a site is essentially one of economic effect. That is, we accept that the cost of constructing the honeycomb of internal cells within a waste disposal site is revenue expenditure, provided the cells are filled and sealed within two years.

As a result of that article, we have received a number of enquiries concerning the distinction between the capital costs of engineering a site to receive waste and the revenue costs of creating internal cells. The purpose of this article is to clarify that distinction.

Preparation Expenditure

Engineering a modern waste disposal site to the point where waste can be deposited often includes constructing an impermeable clay layer, or laying an artificial lining, across the base and sides of the site. When the site has eventually been filled these elements, together with the final capping, create a containment structure for the whole site that is likely to fulfil that function for decades. We view the costs of creating such a containment structure as capital expenditure.

Internal Earthworks

For practical and financial reasons, the base and sides of site containment structures are often built in sections, with internal barriers, or 'bunds', on the open sides to create the first level of internal cells (fig. 1). Provided these internal cells are filled and sealed within two years, we accept that the costs of the internal earthworks, i.e. the bunds and any internal caps, are revenue expenditure. However, the costs of the base and sides, which form part of the site containment structure, remain capital expenditure.

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Miscellaneous

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Capital Gains Tax: Taper relief and employee shares held in trust

We have been asked about the date of acquisition, for Capital Gains Tax purposes, of employee shares held in trust and subject to the risk of forfeiture (ROF shares). Employees need to know exactly when they acquire shares because the taper relief due on any gain made on their disposal depends on the number of whole years the shares are held. This is particularly important following the changes to the taper relief rules introduced by Finance Act 2000.

Changes from 6 April 2000

From 6 April 2000 the definition of business asset has been extended to include all shares held in a qualifying company by an employee who works for that company or another company with which the qualifying company has a relevant connection. (There are proposals to further widen the definition of business asset but these are not yet final.) As the definition now stands, a qualifying company is either a trading company or the holding company of a trading group. A company has a relevant connection with a qualifying company where they are both members of the same group of companies or of the same commercial association of companies. A relevant connection will also exist between a joint venture company (or any of its subsidiaries) and any qualifying company directly or indirectly holding at least 30% of its shares. Also from 6 April 2000 the rate of taper relief on business assets has been accelerated. So when an employee acquires shares after 5 April 2000 and those shares are business assets, taper will relieve 75% of any gain on their disposal from Capital Gains Tax if they have been held for at least 4 whole years.

Employee shares held in trust as settled property

This article deals with employee shares held in trust as settled property, that is to say any shares to which no employee or any other beneficiary has yet become absolutely entitled as against the trustees. An employee becomes "absolutely entitled as against the trustees" when the trustees no longer have a right to deal with particular shares, except with the employee's consent, and/or the employee can take control of those shares by giving due notice to the trustees.

If trustees award shares without any restrictions (including the risk of forfeiture) the employee is absolutely entitled to the shares and acquires them at the date they are awarded, whether or not any payment is made for them.

Shares subject to restrictions

Trustees may award shares subject to restrictions. For example the employee may not be allowed to sell the shares for three years, or the shares may become forfeit in certain circumstances. If the employee makes no payment for such shares then for Capital Gains Tax purposes, he/she initially acquires an interest in the settled property, rather than in the shares themselves. The employee is treated as acquiring the actual shares only on the date when the restrictions or risk of forfeiture are removed and he/she becomes absolutely entitled to them.

If the employee makes a payment to acquire restricted shares or ROF shares, the normal Capital Gains Tax rules apply. The terms of the employee's agreement with the trustees establish when "absolute entitlement as against the trustees" occurs. This will determine whether the shares themselves are acquired at the time of the agreement or whether the shares remain settled property until the restrictions or risk of forfeiture are removed.

Approved employee share schemes

There are special rules for shares acquired under approved profit sharing schemes. Even though the shares must remain in trust the employee is treated as becoming absolutely entitled to the shares in an approved profit sharing scheme as soon as the trustees award them. For Capital Gains Tax purposes the employee is therefore treated as acquiring those shares at the date of the award.

Similarly an employee is treated as becoming absolutely entitled to shares in an approved All Employee Share Ownership Plan at the time those shares are awarded by the trustees, even though the shares may have to remain in trust for a time. But any increase in the value of the shares whilst they remain in the plan is not charged to Capital Gains Tax when those shares are later sold. This means that if the employee keeps the shares in the plan until sale, any gain is free of Capital Gains Tax (and consequently no taper relief is due). If, however, the employee removes the shares from the plan and sells them at a later date, the shares are treated for Capital Gains Tax purposes as being acquired on the date the employee removed them from the plan.

The acquisition cost of the shares is deemed to be the market value on that date.

Schedule E

An employee who is awarded shares may also be liable to Income Tax under Schedule E. The date the employee receives a Schedule E emolument may differ from that taken as the date on which the shares are acquired for Capital Gains Tax purposes. And where ROF shares are involved and the risk of forfeiture can last for more than five years there may be Schedule E charges both at the date of the initial award and on removal of the risk. But the timing of the Schedule E emoluments charge does not affect the date of acquisition which applies for Capital Gains Tax purposes.

Summary

To summarise, where trustees of settled property award ROF shares or shares subject to any other restrictions to employees, for Capital Gains Tax purposes the employees acquire the shares when the risk of forfeiture or other restriction is removed. The only exceptions are shares awarded under approved profit sharing schemes and approved All Employee Share Ownership Plans. There are special rules for both of these.

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Investment Manager Provisions FA 1995

The Revenue has published a revised Statement of Practice relating to the application of S126 et seq. FA95 to UK investment managers. The Statement of Practice is published on the Revenue's web-site. Questions arising from the Statement of Practice should be addressed to:

Douglas Rankin
Inland Revenue
International
Room 205
Victory House
30/34 Kingsway
London
WC2B 6ES

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

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Inland Revenue Statements of Practice and Extra-Statutory Concessions issued between and 1 December 2000 and 31 January 2001.

Extra-Statutory Concessions

Number Title Date of Issue
F20 Ex-gratia payments in Britons held prisoner by the Japanese 24/1/01

Statement of Practice

Number Title Date of Issue
SP1/01 Treatment of Investment Managers and their overseas clients 11/1/01

There have been no Statements of Practice issued in this period

You can get copies of SPs and ESCs from the Inland Revenue Visitors Information Centre, Ground Floor, South West Wing, Bush House, Strand, London WC2B 4RD or by ringing the Inland Revenue Enquiry line on 020 7438 6420.

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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, Sarah Guerra, Room 402, 22 Kingsway, London WC2B 6NR or e-mail sarah.guerra@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 Miss F. Chowdhury, Room 439, 22 Kingsway, London WC2B 6NR. Telephone: 020 7438 7812. 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 408, 22 Kingsway, London, WC2B 6NR.

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