Northern Ireland Tax Notes.

Taxation of businesses

Associated companies - Capital Gains Tax degrouping charge

Previous Tax Notes have covered the case of Johnston Publishing (North) Limited v CRC, which concerns the associated companies exemption to a degrouping charge arising under the provisions of section 179 TCGA 1992. HMRC's view of the law was upheld by the Court of Appeal and HMRC Brief 59/08 provides more information on Revenue's approach to certain examples. The basic principle is that exemption from a degrouping charge will only apply for transactions between group members treated as 'associated' both at the time of the original transfer and also at the time of leaving the capital gains tax group. HMRC's latest guidance (which includes some worked examples) should be taken into account in advising on the sale of companies out of existing corporate groups and which hold assets previously acquired through an intragroup transfer.

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The Taxation of Foreign Profits

Draft legislation and guidance notes on the taxation of foreign profits measures were issued in December 2008 and the consultation period closed in early March. Judging from comments made in the course of HMRC workshops and open days, it is understood that proposals made in respect of dividend tax exemptions were generally well received. Consequential changes to the controlled foreign companies regime have not generated a great deal of controversy.

The proposed rules surrounding the imposition of a worldwide debt cap have however attracted a comparatively high level of interest and debate. Government's objective here is to prevent what it perceives as the UK's generous regime for interest relief on debt being used alongside a dividend exemption to reduce the UK tax base.

The central policy aim of the worldwide debt cap is to stop high debt gearing of UK companies by restricting the amount of tax relief claimed by UK members of a large group by reference to the consolidated amount of external interest paid by the group as a whole. In particular, government have in mind the example of a cash-rich multinational corporate group which uses intra-group financing to gear up its UK sub-group and reduce the quantum of profits subject to UK corporation tax. HMRC have announced that exclusions will be provided for companies with financial services trades.

Following what is expected to be a large number of responses to the consultation document concerning the operation of a debt cap, it is anticipated that revised draft legislation and guidance will be issued in due course.

Thin capitalisation

A new Business International Directorate has been set up by HMRC to deal with the following international tax issues:-

* Thin capitalisation

* Financial services transfer pricing

* Attribution of profits to permanent establishments

* Arbitrage avoidance

* Unallowable interest rules.

HMRC have also published a Business Brief 1/09 to provide additional guidance on the operation of procedures around the system of advance thin capitalisation agreements. The Brief is in the form of frequently asked questions and gives useful detailed information on both the procedure and theory behind the ATCA system.

Taxation of individuals

Non dom rules and transfer of assets abroad

Further sets of frequently asked questions and answers have been published on the HMRC website in relation to the new remittance basis rules. The range of issues covered include the remittance basis, the [pounds sterling]30,000 charge, personal allowances, what counts as a remittance and capital losses.

Also worthy of note concerning the taxation of individuals arriving and leaving the UK is the recent case of Burns v HMRC. The case involved whether the motive defence was available to counter a charge to income tax under the rules dealing with transfers of assets abroad. The taxpayer lost in this case and some professional commentators have suggested that the defence is unlikely to be available for individuals coming to the UK if, at the time of transferring assets into offshore vehicles, they were anticipating becoming UK resident.

Online filing

The drive towards doing more compliance over the internet continues and HMRC have announced a 51% increase in the number of tax returns filed online by the 31 January 2009 deadline, compared with the same period in 2008. A total of 5,759,006 self assessment returns were filed online, approximately 67% of the total number of returns for the tax year to April 2008.

Inheritance Tax - BPR clearances

The availability of Business Property Relief can often involve substantial amounts of Inheritance Tax and HMRC's announcement that the clearance scheme for BPR is to continue has been welcomed. Full details on the functioning of the scheme are available on HMRC's website at www.hmrc.gov.uk/cap/clearanceiht.htm.

General

Budget Day

The Chancellor has announced that Budget Day will be 22 April 2009. This is approximately one month later than usual to allow for more time to evaluate measures to deal with the economic effects of the global economic downturn and to assess the impact of stimulus action taken in the Pre-Budget Report.

Time to Pay

It is perhaps worth a reminder that one of the welcome initiatives in the Pre-Budget Report was a facility to apply to HMRC for deferral of payment of tax liabilities on agreed terms. HMRC has set up the Business Payment Support Service and taxpayers in financial difficulties and their advisers have been encouraged to contact the BPSS to submit requests for additional Time to Pay. HMRC have announced that the majority of applications submitted to date have requested deferrals of approximately three to six months and it should be noted that interest is charged by HMRC at the current rate on late payments.

By Phillip McMaw, FCA

Phillip McMaw, FCA is Tax Partner with KPMG in Belfast.