The anti-avoidance drive
Second and final part of article on the Budget and Finance Acts covers the tightening of SDLT rules and other changes affecting businesses
Stamp duty land tax
Quite apart from any new legislative changes, the basic administration of SDLT continues to cause enormous practical and administrative problems. Once one moves beyond basic purchases and some new leases (and even then, sometimes), there is great difficulty not only in working out what the tax should be, but also in completing the forms and especially in getting the certificate back. Nothing which has been done in new legislation will ease this particularly, although the relatively imminent introduction of e-filing (which should happen before the end of the year) will assist in administration considerably. But this will not assist with the complications of the tax, which get worse, not better.
It is unsurprising that as part of the pre-election shooting of the Conservative fox, the very first Inland Revenue Budget Note was on the subject of SDLT. Of course this was aimed entirely at the increase in the domestic threshold, rather than the other changes which appeared in the smaller print, buried within the press releases.
The basic change was simple – a doubling of the threshold for residential purposes from £60,000 to £120,000. It is worth a reminder that mixed properties are not residential, so there may be some merit on occasions in separating out titles of suitable properties.
Much less prominence was given to the immediate abolition of disadvantaged area relief for commercial property. This is, in effect, an extremely serious rise in tax for property in large areas of the country, most of which will involve payment of SDLT at the highest rate (4%). The sums raised certainly exceed any overall savings from the rise in the residential threshold.
This change was brought into effect on Budget day, but the relief was preserved for the completion or substantial performance of contracts entered into on or before 16 March 2005, provided that there is no variation or assignment of the contract or sub-sale of the property and that the transaction is not the exercise of an option or right of pre-emption. These transitional provisions, like those on the introduction of SDLT itself, will cause careful examination of a range of old contracts, to see if what is being done can fall within their terms. This is a factor well worth considering in all transactions which could derive from older contracts.
Looking more to the future is the very serious introduction of a reporting obligation in relation to SDLT saving schemes. This was put as follows:
“The new rules will ensure promoters or users provide details to the Inland Revenue of schemes and arrangements whose use might be expected to provide, as a main benefit of using the scheme, an SDLT advantage concerning property which:
- is not residential property (as defined in section 116 FA 2003);
- and which has a market value of at least £5 million.
“The Inland Revenue will not issue a reference number for such schemes and a promoter will have no obligation to convey a reference number to a client.
“Consequently, in most cases users of a scheme will have no obligation to provide the Inland Revenue with information. But in some circumstances the users themselves will be required to provide information about the scheme.
This is where:
- the promoter is offshore;
- the user has devised the scheme in-house; or
- the promoter is a lawyer who cannot make a full disclosure without revealing legally privileged material.
“In the last case the client can choose to waive the right to privilege and allow the lawyer to make the disclosure.”
This regime has now come into force following Royal Assent to the second Finance Act.
The last comment by the Revenue highlights an area of great interest. Generally under the disclosure rules (which of course apply already to certain avoidance schemes involving financial products and employment, and in a different way to value added tax), lawyers cannot be compelled to provide the Revenue with information. The Revenue believes that the client must then do so, but that is at least open to some doubt.
Certainly, these new rules will require at least some attention in any case where SDLT saving is attempted, although the position will probably settle down in due course.
It is worth noting that there are already a string of measures proposed which close perceived loopholes which have come to the Revenue’s attention as a result of disclosures in relation to so-called financial products, and a similar new raft of legislation in relation to SDLT can be anticipated.
More changes were announced immediately in relation to SDLT avoidance. The brief details of these are as follows:
(a) Changes to the group relief provisions in Part 1 of Schedule 7 Finance Act 2003. Under the pre-2005 rules group relief is clawed back if the transferee company ceases to be a member of the same group as the transferor company within three years of the transfer. This is subject to various let-outs. The new rules will extend the circumstances in which clawback will occur.
This is at least capable of catching innocent transactions; in any company sale, an SDLT history in relation to previous transfers and group relief claims may be necessary. It is a typical example of what may be needed for anti-avoidance, stretching very far, at least administratively (with an increase in costs), and perhaps substantively.
There is a similar change made to the rules on the withdrawal of acquisition or reconstruction relief, where rent is involved as consideration.
There is a further, much more general change to the rules on group relief. In keeping with other tax provisions for group reliefs, a general rule excluding it in certain circumstances is enacted as a new subparagraph in Schedule 7, paragraph 2, denying relief where the transaction is not effected for bona fide commercial reasons, or where it forms part of arrangements of which the main purpose, or one of the main purposes, is the avoidance of liability to (virtually any) tax.
This new provision is well known elsewhere in our legislation. Its familiarity does not make it any easier to prove (for example) that things were not done with a tax-saving motive in mind. It does seem to be another attempt actually to prevent avoidance, as well as evasion, throughout the tax system.
(b) Changes to the acquisition relief provisions in Part 3 of Schedule 7 Finance Act 2003. The legislation (FA 2003, Schedule 7, paragraph 8) currently refers to an “undertaking”. The new provisions require that the “undertaking” must be a trade and must not be a trade consisting wholly or mainly in land transactions.
It was always a little doubtful the extent to which the relief applied to undertakings consisting, essentially, of let investment properties. This makes it clear, now, that it does not.
A similar, general “commercial purpose” rule is introduced to acquisition relief as will apply for group relief.
(c) Changes to the provisions on transactions by or with bare trustees, so far as they affect the grant of new leases. The provisions of paragraph 3 of Schedule 16 Finance Act 2003 (which provide that the acts and property of a bare trustee are attributed to the beneficiary) will not apply to the grant of a lease. In other words, the fact that one of the parties to a lease is a bare trustee will be ignored in determining the charge on the grant of a new lease.
This will prevent the use of leases to bare trustees in certain tax planning schemes involving leases. It is a reminder of the difficulties surrounding the use of bare trustees in general – not to mention the grave doubts which exist in Scotland about transactions between bare trustees and beneficiaries, certainly a problem in relation to leases between such persons.
(d) Changes to the rules on contingent consideration to provide that where consideration is in the form of a “loan” or “deposit” the contingency of repayment is ignored. This is aimed at what might be thought of as more purely avoidance transactions, where sale consideration is disguised as an apparent loan.
(e) Definition of company in relation to transactions involving public bodies. A change is made to section 66, which restricts the relief to companies established by local authorities only if they are genuine, “Companies Act” companies as opposed to the wider definition of corporate bodies used elsewhere in the legislation.
(f) Changes to the charge on the sale element of a sale and lease-back (or lease and lease-back) transaction. At present (because the transaction is an exchange) the charge is on the market value of the ownership or head lease; and the lease-back is given an exemption from tax. A new rule was announced in the Budget to the effect that this market value of the ownership is to be determined ignoring any effect of the lease-back, or of a prior agreement to lease back. This was apparently always the Inland Revenue view, but it may yet be confirmed in legislation.
(g) A change to the rules on the interaction between sub-sale and alternative property finance reliefs. Section 45 will be amended by Finance (No 2) Act 2005, so that sub-sale relief is not available where the relief under section 73 for alternative finance mortgages is also claimed in the same transaction.
In addition, the rules on alternative property finance reliefs were reconstituted to permit relief in Scottish transactions involving common ownership (see Finance Act 2003, section 72A inserted by Finance Act 2005).
There is no doubt that the Revenue is doing its best to stamp out SDLT avoidance and that this can be expected to continue. Some savings are still possible, but they can be expected to become more difficult to achieve.
On other matters affecting land, it seems unlikely that the introduction of enhanced capital allowances under a business premises renovation scheme for some properties in disadvantaged areas will make up for the loss of SDLT relief.
There is a further important discussion paper on real estate investment trusts, already under discussion for a very long time.
More on company/business tax
In fact, the changes in SDLT probably represent the most important tax development in this Budget for most businesses. Elsewhere, the anti-avoidance theme continues, with measures to prevent avoidance through so-called arbitrage, the use of certain financial transactions to (for example) create losses or turn revenue profits into capital gains and the use of double taxation treaties to obtain reliefs which were not intended to be exploited in ways which were being applied by international businesses.
New measures were announced in relation to the introduction of International Accounting Standards.
Various changes are made to the rules for the tax relief available to film partnerships, and otherwise in relation to film production. These on the one hand restrict perceived avoidance of tax, but on the other extend relief available for low budget (up to £15 million) UK films.
An incentive was introduced for research spinout companies, which may affect our educational clients. Basically, this allows a deferral of tax and NI on shares and other benefits provided to participators at an early stage, so that the tax and NI will not be payable unless and until the spinout company is successful.
On VAT, there are again extensions to the anti-avoidance rules and the requirements to disclose VAT planning arrangements. Perhaps the most significant affects schemes which attempt to remove the effect of an election to waive exemption.
Detailed changes are made to the rules for partially exempt traders, in relation to the various and particularly the special methods which can be used to work out the partial exemption.
The rules to prevent so-called unjust enrichment have been extended, where VAT has been incorrectly charged to customers.
There is an extension of the VAT recovery available to local authorities in connection with childcare and other welfare services.
On a more mundane level, the VAT registration threshold rose to £60,000 from 1 April, with the deregistration threshold rising to £58,000; and there are changes in the fuel scale charge.
And the rest
The payment of North Sea oil taxation is to be advanced, which will pay for a large amount of the tax reductions and other “giveaways” in this Budget. In contrast, the “normal” rise in fuel duty was deferred, originally until September and now indefinitely; and many of the minor taxes and duties (e.g. air passenger duty and insurance premium tax) are not to be increased.
The same applies to the duty on spirits, while rises in the other “sin taxes” (beer, wine, cigarettes, gaming) were restricted to inflation – perhaps the best sign of the impending election at the time of the Budget!
As in almost all previous years, there were promises about reducing bureaucracy and cutting red tape. It is a measure of how important this has become that if such promises were actually to be fulfilled, their importance would outweigh almost all of the tax measures outlined in this particular Budget.
Alan R Barr, Brodies LLP and the University of Edinburgh