Master Notes

Budget 2008
BUDGET NOTES
12 March 2008
Budget Notes contain technical information additional to the press notices issued by HM
Treasury with the Budget. They are not the same as press notices, which are primarily
used as brief explanations of new policy for the media, but rather contain additional, more
detailed information on the changes to tax law announced in the Budget. As such they are
designed to assist businesses that may be immediately affected by the changes, and to
provide more technical information to those with a specialist interest such as tax
consultants and advisers, City financial institutions and local HM Revenue and Customs
offices. This information is also published on the Treasury and HM Revenue and Customs
internet sites.
CONTENTS:
BN Budget Note Page
1 Modernising the Personal Tax System 5
2 Corporation Tax Main Rates 7
3 Corporation Tax Small Companies’ Rates 9
4 Simplification of Associated Companies Rules 11
5 Amendments to the Research & Development and 13
Vaccine Research Relief Schemes
6 Capital Allowances: Industrial Buildings Allowances, 15
Enterprise Zone Allowances and Agricultural Buildings
Allowances
7 Capital Allowances: Plant and Machinery Allowances: 19
Integral Features and Thermal Insulation
8 Capital Allowances: Plant and Machinery: Rate Changes 21
and New Special Rate Pool
9 North Sea Fiscal Regime 25
10 100 Per Cent First-Year Capital Allowances for Natural 29
Gas, Biogas and Hydrogen Refuelling Equipment
11 100 Per Cent First-Year Allowances for Expenditure on 31
Cars with Low Carbon Dioxide Emissions
12 Capital Allowances: Plant and Machinery: Annual 33
Investment Allowance
13 Enhanced Capital Allowances for Energy Efficient and 37
Water Saving (Environmentally-Beneficial) Technologies
14 Capital Allowances: Introduction of First-Year Tax Credits 39
15 Capital Allowances: Small Plant and Machinery Pools 41
16 Venture Capital Schemes 43
17 Community Investment Tax Relief and Banking 45
18 Enterprise Management Incentives 47
19 Trading Stock 49
20 Leased Plant or Machinery: Anti-Avoidance 51
21 Financial Products Avoidance: Disguised Interest and 55
Transferring Rights to Lease Rentals
22 Controlled Foreign Companies: Anti-Avoidance 59
23 Corporate Intangible Assets Regime: Anti-Avoidance 63
24 Capital Allowances Buying and Acceleration: Anti- 65
Avoidance
25 Employment-Related Securities: Deductible Amounts 67
26 North Sea Management Expenses 69
27 Unclaimed Assets Scheme: Tax Changes 71
28 Investment Manager Exemption 73
29 Taxation of Personal Dividends 75
30 Funding Bonds 77
31 Offshore Funds: New Tax Regime 79
32 Timing of Income Tax Payments by Unauthorised Unit 81
Trusts
33 Funds of Alternative Investment Funds 83
34 Property Authorised Investment Funds 85
35 Repeal of Obsolete Anti-Avoidance Provisions 87
36 Life Insurance Companies: Consultation Outcomes and 91
Simplification
37 Life Insurance Companies: Interest Apportionment 95
38 Insurance Premium Tax (IPT): Changes relating to 97
Overseas Insurers
39 Stamp Duty: Alternative Finance: Sukuk 99
40 Alternative Finance Arrangements 101
41 Overseas Pension Schemes 103
42 Pensions: Regulation Making Powers 105
43 Pensions: Technical Improvements 107
44 Approved Occupational Pension Schemes 109
45 Pension Savings and Inheritance Tax 111
46 Inheritance Tax: Transitional Serial Interests 113
47 Inheritance Tax (IHT) Nil-Rate Band 115
48 Capital Gains Tax: Relief on Disposal of a Business 117
(Entrepreneurs’ Relief)
49 Child Trust Fund: Voucher Requirement 121
50 Individual Saving Accounts and Northern Rock Bank 123
51 Individual Saving Accounts and other Savings Accounts: 125
Reducing the Administrative Burden
52 Gift Aid: Transitional Relief 129
53 Income of Beneficiaries Under Settlor-Interested Trusts 131
54 Stamp Duty: Changes to Loan Capital Exemption 133
55 Reduction of Stamp Duty Administrative Burden 135
56 Stamp Duty Land Tax (SDLT) Relief for New Zero-Carbon 137
Flats
57 Stamp Duty Land Tax (SDLT): Notification Thresholds for 139
Land Transactions and Rate Thresholds for Leasehold
Property
58 Stamp Duty Land Tax (SDLT): Anti-Avoidance Legislation 143
Affecting Partnerships
59 Stamp Duty Land Tax: Group Relief: Anti-Avoidance 145
60 Stamp Duty Land Tax (SDLT): Alternative Finance: Anti- 147
Avoidance
61 Greater London Authority Severance Pay 149
62 Armed Forces Council Tax Relief 151
63 Restrictions on Trade Loss for Individuals 153
64 Double Taxation Relief: Income Tax 155
65 Avoidance of Income Tax Using Manufactured Payments 157
66 Double Taxation Treaty Abuse 159
67 Tax Avoidance Disclosure Regime: Scheme Reference 161
Number System
68 Income Tax Exemptions for the Return to Work Credit, In- 163
Work Credit, In-Work Emergency Discretion Fund and In-
Work Emergency Fund
69 Company Car Benefit Tax 165
70 Employer Provided Vans: Fuel Benefit Rules 167
71 Hydrocarbon Oils: Duty Rates Changes and Rates 169
Simplification
72 New Aviation Duty Replacing Air Passenger Duty (APD) 173
73 VAT: Increased Turnover Thresholds for Registration and 175
Deregistration
74 VAT: Amendment to the Exemption for Fund Management 177
75 Indirect Tax Returns: Correction of Errors 179
76 VAT: Changes in Fuel Scale Charges 181
77 VAT: Reduced Rate for Smoking Cessation Products 185
78 VAT: Transitional Period for Claims 187
79 VAT: Option to Tax Land & Buildings 189
80 Landfill Tax: Exemption for Waste from Cleaning Up 191
Contaminated Land
81 Landfill Communities Fund 193
82 Landfill tax: Standard Rate 195
83 Aggregates Levy: Rate 197
84 Climate Change Levy: Rates 199
85 Climate Change Levy (CCL): Electricity from Coal Mine 201
Methane
86 Climate Change Levy (CCL): Climate Change Levy 203
Accounting Documents (CCLADs): Simplification
87 Energy Products Directive: Expiry of Derogations 205
88 Amusement Machine Licence Duty (AMLD): Gaming 207
Machines
89 Gaming Duty: Revalorisation of Duty Bands 209
90 Tobacco Products Duty: Rates 211
91 Alcohol Duty: Rates 213
92 Calculation of Alcohol Duty 215
93 Excise Reviews and Appeals 217
94 Waiving Interest and Surcharges for those Affected by 219
National Disasters
95 Power to Give Statutory Effect to Existing Concessions 221
96 HMRC Review of Powers, Deterrents and Safeguards: 223
Penalties for Incorrect Returns & Failure to Notify a
Taxable Activity
Compliance Checks
Payments, Repayments and Debt
99 Changes to Customs Powers 233
100 Tribunal Reform: Simplifying HMRC’s Approach to 235
Appeals
101 Tax Law Rewrite: Remittance Basis and Foreign Dividend 237
Income
102 Residence & Domicile: The Residence Test and Day 239
Counting Rules
103 Residence & Domicile: Personal Allowances and the 241
Remittance Basis
104 Residence & Domicile: Closing Loopholes in the 243
Remittance Basis
105 Residence & Domicile: Remittance Basis and Art for Public 249
Display
106 Residence & Domicile: Changes for Employment-Related 251
Securities
107 Residence & Domicile: Annual £30,000 Charge for Some 253
Users of the Remittance Basis
HM REVENUE AND CUSTOMS PRESS OFFICE
Press enquiries: 020 7147 0798 / 2324 / 2328 (Business Tax Desk)
020 7147 2318 / 2333 / 2319/ 0051/ 0394 (Personal Tax
Desk)
020 7147 2314 / 2331 / 0052 (Law Enforcement Desk)
07860 359544 (Out of hours)
GOVERNMENT DEPARTMENT INTERNET SITES
Further information and all published documents relating to the Budget may
be found on the Internet at the following addresses:
HM Treasury: www.hm-treasury.gov.uk
HM Revenue and Customs: www.hmrc.gov.uk

BN01
MODERNISING THE PERSONAL TAX SYSTEM
Who is likely to be affected?
1. Income tax payers.
General description of the measure
2. These changes are part of a package of measures announced at Budget

2007.
3. From 2008-09, the basic rate of income tax will be reduced to 20 per cent.
The 20 per cent savings rate will be merged with the basic rate.
4. The existing 10 per cent starting rate will be abolished. A new 10 per cent
starting rate for savings will be introduced.
5. These changes reduce the main rates of income tax to two: the basic rate
and the higher rate.
6. Age-related personal allowances for those aged 65 to 74 and 75 and over

will be increased by £1,180 above indexation. For 2008-09, the
age-related allowance for someone aged 65 to 74 will be £9,030 and the
age-related allowance for someone aged 75 or over will be £9,180.
7. A Treasury order was made on 10 December 2007 which increased the

basic personal allowance by indexation to £5,435 for 2008-09.
8. There is no change to the 40 per cent higher rate. There are no changes
to the 10 per cent dividend ordinary rate or the 32.5 per cent dividend
upper rate.
Operative date
9. These changes have effect on and after 6 April 2008.
Current law and proposed revisions
10. Legislation will be included in Finance Bill 2008 to make the necessary
changes to Income Tax Act 2007 (ITA) and the Income and Corporation
Taxes Act 1988.
11. For 2007-08, the basic rate of income tax is 22 per cent. It is payable
between the starting rate and basic rate limits of £2,230 and £34,600. For
2008-09, the basic rate will be reduced to 20 per cent. It will be payable
up to the basic rate limit of £36,000.
Budget 2008 Notes Page 5 of 270

12. Savings income which falls within the basic rate band is taxable at the
20 per cent savings rate. From 2008-09, the savings rate will be abolished
and savings income which falls within the basic rate band will be taxable at
the 20 per cent basic rate.
13. For 2007-08, the first £2,230 of an individual’s income is taxable at the
10 per cent starting rate.
14. Legislation in Finance Bill 2008 will abolish the 10 per cent starting rate
and introduce a new 10 per cent starting rate for savings and starting rate
limit for savings. For 2008-09, the starting rate limit for savings will be
£2,320. ITA sets out different types of income and the order in which they
are taxed. The first slice is non-savings income, which is not separately
defined in ITA but broadly covers earnings, pensions, taxable social
security benefits, trading profits and income from property. The next slice
is savings income (broadly, bank and building society interest). Dividend
income is the top slice. There are no changes to these rules for 2008-09.
15. Should an individual’s non-savings income exceed the new starting rate
limit for savings, then the starting rate for savings will not be available for
the savings income. The individual’s savings income will be charged to
tax at the 20 per cent basic rate up to the basic rate limit of £36,000. This
is unchanged from the way in which savings income is currently taxed.
However, should an individual’s non-savings income be less than the
starting rate for savings limit, then the savings income will be taxable at
the 10 per cent starting rate for savings up to the limit.
16. Legislation provides that the personal allowances are increased in line with
price inflation each year, unless overridden by the Finance Act. Finance
Bill 2008 will increase the amounts for those aged 65 and over by £1,180
above indexation. There are three levels of personal allowance: the basic
level for those aged under 65 (£5,435 for 2008-09), and higher levels for
those aged 65 to 74 (£9,030 for 2008-09) and those aged 75 and over
(£9,180 for 2008-09).
Further advice
17. If you have any questions about these changes to income tax, please
contact Paul Thomas on 020 7147 2479 (email:
paul.thomas@hmrc.gsi.gov.uk). Information about Budget measures is
available on the HM Revenue & Customs website at www.hmrc.gov.uk

BN02
CORPORATION TAX MAIN RATES
1. Companies with profits above the upper relevant maximum amount

(URMA) (currently £1.5m), companies that are part of a group with profits
above the URMA, and companies with profits from oil extraction and oil
rights in the UK and the UK Continental Shelf (‘ring fence profits’).
2. Legislation will be introduced in Finance Bill 2008 to set the main rate of
corporation tax (CT) at 28 per cent on and after 1 April 2009.
3. The main rate of CT for companies’ ring fence profits will also remain at
30 per cent on and after 1 April 2009.
Operative date
4. These rates will have effect on and after 1 April 2009.
5. The various CT rates are to be found in the Income and Corporation Tax
Act 1988 and are legislated annually in the Finance Act (FA). The current
provisions for the charge of CT can be found at sections 2-3 of FA 2007.
6. The current rules at section 2 of FA 2007 provide that the main rate of CT
is chargeable at 28 per cent on profits (above £1.5 million) of companies
other than ring fence profits, and 30 per cent on ring fence profits (above
£1.5 million) of companies.
Further advice
7. If you have any questions about this change, please contact your local
HMRC office. Information about Budget measures is available on the HM
Revenue & Customs website at www.hmrc.gov.uk

BN03
CORPORATION TAX SMALL COMPANIES’ RATES
1. Companies with profits chargeable to corporation tax (CT) lower than the
lower relevant maximum amount (LRMA) (currently £300,000), companies
with CT profits between LRMA and the upper relevant maximum amount
(URMA) (currently £1.5m), and companies with profits from oil extraction
and oil rights in the UK and the UK Continental Shelf (‘ring fence profits’)
2. Legislation will be introduced in Finance Bill 2008 to set the small

companies’ rate for all profits, apart from ring fence profits, at 21 per cent
from 1 April 2008 and set the fraction used in smoothing the difference
between the main rate of CT and the small companies’ rate (marginal
small companies’ rate) at 7/400. Profits limits will remain the same.
3. The small companies’ rate for ring fence profits will remain at 19 per cent
from 1 April 2008 and the marginal small companies’ relief fraction for ring
fence profits will remain at 11/400.
Operative date
4. The measure will have effect on and after 1 April 2008.
5. The various CT rates are to be found in the Income and Corporation Taxes
Act 1988 (ICTA) and are legislated annually in the Finance Act (FA). The
current provisions for the charge of CT can be found at sections 2 and 3 of
FA 2007.
6. The current rules at section 13 of ICTA provide that, where a company is

not a close investment-holding company and its CT profits (other than ring
fence profits) are lower than the LRMA (currently £300,000), those profits
are taxed at the lower rate of CT, known as the ‘small companies’ rate’
(currently 20 per cent).
7. Legislation introduced in Finance Bill 2008 will amend the small

companies’ rate to 21 per cent for the non-ring fence profits. The small
companies’ rate for ring fence profits will remain at 19 per cent for the
financial year 2008-09.

8. Section 13 (2) of ICTA entitles companies with a profit of between
£300,000 and £1.5m to marginal relief (‘marginal small companies’ relief’)
from tax computed at the main rate. The fraction used in calculating this
relief is currently 1/40 for non-ring fence profits and 11/400 for ring fence
profits.
9. The changes to the small companies’ rate mean that the fraction for non-
ring fence profits will be adjusted to 7/400 and for ring fence profits the
fraction will remain at 11/400.
10. The upper and lower limits for small companies’ rate are set at section
13(3) of ICTA. These will remain unchanged.
Further advice
11. If you have any questions about this change, please contact your local
HMRC office. Information about Budget measures is available on the HM

BN04
SIMPLIFICATION OF ASSOCIATED COMPANIES RULES
1. Companies whose directors or shareholders are separately members of

business partnerships.
2. Simplification of associated companies rules as they apply to the small

companies rate (SCR) of corporation tax.
Operative date
3. This measure will have effect on and after 1 April 2008.
4. The SCR rules are contained in section 13 of the Income and Corporation
Taxes Act 1988 (ICTA). The SCR has effect for companies whose annual
rate of profits does not exceed the ‘lower relevant maximum amount’
(section 13(1)). If the rate is above this amount but does not exceed the
‘upper relevant maximum amount’ a marginal relief is due (section 13(2)).
5. The upper and lower maximum relevant amounts are set out in section
13(3). Section 13(3)(b) reduces the amounts if the company has one or
more associated companies. ‘Associated company’ is defined at section
13(4) as one company controlling another or two companies being under
common control, with section 416 of ICTA being used to determine control.
In establishing control of a company, section 416(6) requires the attribution
to a person of any rights or powers held by his associates.
6. Section 417(3) of ICTA defines the meaning of associate and section

417(3)(a) includes business partner within that definition.
7. Legislation will be introduced in Finance Bill 2008 to revise the definition of

‘control’, solely for the purposes of SCR, by amending the wording of
section 13(2) of ICTA and inserting new subsections 4A, 4B and 4C into
section 13 of ICTA.

8. The new wording and subsections will ensure that the rights or powers
held by business partners will be attributed only when “relevant tax
planning arrangements have at any time had effect in respect of the
taxpayer company”. “Relevant tax planning arrangements” will be defined
as arrangements which involve the shareholder or director and the partner
and secure a tax advantage by virtue of greater relief under section 13 of
ICTA.
Further advice
9. If you have any questions about this change, please contact Simon
Moulden on 020 7147 2629 (email: simon.moulden@hmrc.gsi.gov.uk).
Information about Budget measures is available on the HM Revenue &
Customs website at www.hmrc.gov.uk

BN05
AMENDMENTS TO THE RESEARCH & DEVELOPMENT AND

VACCINE RESEARCH RELIEF SCHEMES
1. Companies making claims to relief under the Research & Development

(R&D) and the Vaccine Research Relief (VRR) tax relief schemes.
2. Budget 2007 announced a package of business tax reforms which

included an increase in the rate of R&D relief for all companies. Legislation
will be introduced in Finance Bill 2008 to increase the rate of relief under
the small and medium company (SME) scheme from 150 per cent to
175 per cent. The rate of relief under the large company scheme will be
increased from 125 per cent to 130 per cent.
3. The UK’s SME R&D and VRR schemes are notified State aids and must
comply with European Commission (EC) Guidelines before approval will
be granted for the rate increase, and other recent amendments. In order to
achieve this, the UK is amending the schemes to prevent companies
whose most recent accounts are not produced on a going concern basis
from claiming relief. A cap is also being introduced to restrict the amount of
relief available under the SME or VRR schemes to €7.5 million per R&D
project. Large companies will have to make a declaration concerning the
incentive effect of the relief they are claiming under the VRR scheme.
Operative date
4. This measure will have effect from a date to be appointed by Treasury

order. The Government is currently in discussions with the EC to ensure
that the proposed amendments meet with EC State aid approval rules.
The appointed date will be announced once approval has been received.
5. Schedule 20 to the Finance Act (FA) 2000 provides for tax relief for small
and medium companies undertaking qualifying R&D activities. A
50 per cent enhancement of qualifying expenditure can be claimed under
the scheme and in some circumstances this can lead to a payable credit.
6. Schedule 12 to FA 2002 provides for tax relief for large companies

undertaking qualifying R&D activities. Large companies can claim a
25 per cent enhancement of their qualifying expenditure under this
scheme.

7. Schedule 13 to FA 2002 provides for tax relief for companies of all sizes
carrying out vaccine research (vaccine research relief). The relief is in the
form of a 50 per cent enhancement of qualifying expenditure and in the
case of small and medium companies can result in a payable tax credit.
8. Legislation to be introduced in Finance Bill 2008 will increase the rate at

which relief will be available under the R&D schemes. For SMEs the rate
will increase from 150 per cent to 175 per cent and for large companies
the rate will increase from 125 per cent to 130 per cent. New conditions
will also be added to the SME and VRR schemes. The first of these will
prevent companies whose most recent accounts have not been prepared
on a going concern basis from claiming relief. The second introduces a
cap of €7.5 million on the amount of relief available per R&D project under
the SME and VRR schemes, and the third introduces a requirement that
large companies claiming VRR make a declaration as to the incentive
effect of the relief.
9. In order to ensure that the SME and VRR schemes remain consistent with
State aid requirements, the amount of relief available under the VRR
scheme will be reduced for all companies from 50 per cent to 40 per cent.
Further advice
10. If you have any questions about this change, please contact Lynn Carroll
on 020 7147 2636 (email: lynn.carroll@hmrc.gsi.gov.uk) or Peter Faherty
on 020 7147 2700 (email: peter.faherty@hmrc.gsi.gov.uk). Information
about Budget measures is available on the HM Revenue & Customs
website at www.hmrc.gov.uk

BN06
CAPITAL ALLOWANCES: INDUSTRIAL BUILDINGS

ALLOWANCES, ENTERPRISE ZONE ALLOWANCES AND
AGRICULTURAL BUILDINGS ALLOWANCES
1. Businesses claiming industrial buildings allowances (IBAs), enterprise

zone allowances (EZAs) and agricultural buildings allowances (ABAs).
2. Budget 2007 announced a business tax reform package including the

gradual withdrawal of IBAs and ABAs over four years.
3. On 17 December 2007, it was announced that the special IBAs commonly

known as enterprise zone allowances (EZAs) would also be withdrawn
from April 2011, and that EZAs (which primarily provide a 100 per cent
incentive allowance) will not be subject to the phasing-out rules applying to
industrial and agricultural buildings allowances.
4. Legislation will be introduced in Finance Bill 2008 to give effect to these

changes. The legislation will also provide that balancing charges in
respect of EZAs will be retained for a limited period.
Operative date
5. The phased withdrawal of industrial and agricultural buildings writing-down

allowances (WDAs) will have effect for chargeable periods ending on or
after 1 April 2008 for businesses within the charge to corporation tax and
6 April 2008 for businesses within the charge to income tax.
6. The withdrawal of EZAs will have effect on and after 1 April 2011, for
businesses within the charge to corporation tax, and 6 April 2011, for
businesses within the charge to income tax.
Industrial buildings allowances
7. IBAs are available under Part 3 of the Capital Allowances Act 2001 (CAA).
They were introduced in 1945. Their scope was subsequently increased to
include buildings and structures like tunnels, bridges, foreign plantations,
highway concessions, qualifying hotels, and commercial buildings in
Enterprise Zones.

Enterprise zone allowances
8. Special rates of IBA, for a wider range of commercial buildings constructed

in enterprise zones were introduced by the Finance Act (FA) 1980. These
allowances are known as enterprise zone allowances (EZAs).
Agricultural buildings allowances
9. ABAs are available under Part 4 of CAA and were introduced in 1946.
ABAs are generally very similar to IBAs, although not identical. For
example, ABAs are only available where the first use of the building is for
the purpose of husbandry and, subject to changes made in FA 2007,
balancing adjustments only occurred when the parties to the transfer of a
relevant interest made an election.
Writing-down allowances (WDAs) and initial allowances
10. In general, the annual rate of WDAs for a person who constructs either an
industrial or agricultural building, or buys it unused, is 4 per cent of the
qualifying expenditure (the construction cost or purchase price) on a
straight-line basis. There is an exception for qualifying expenditure on
buildings in enterprise zones (EZA expenditure) which attracts an initial
allowance of 100 per cent and, where the full initial allowance has not
been claimed, a WDA of 25 per cent per annum, on a straight-line basis.
In all cases, the allowances are given to the holder of the “relevant
interest” who has incurred the qualifying expenditure on the building.
Balancing adjustments and recalculated WDAs
11. Prior to Budget 2007, when a person ceased to have the relevant interest
in an industrial or agricultural building within 25 years of first use (typically
when the building was sold or a leasehold interest came to an end) there
was a balancing adjustment (giving rise to either a balancing charge or a
balancing allowance) based on any difference between the residue of
qualifying expenditure (RQE) and the proceeds from the event. The
person acquiring the building would then be entitled to a recalculated
WDA, based on the expenditure that had not yet been written off (taking
into account the balancing adjustment) divided by the remainder of the
25-year period. For example, if the remainder of the 25-year period was
10 years and the RQE after the sale was £10,000, the buyer would be
entitled to a recalculated WDA of £10,000/10 = £1,000 p.a.
12. To prepare the way for final abolition, Budget 2007 announced the
withdrawal of balancing adjustments and the recalculation of WDAs.
Broadly speaking, this meant that the person acquiring the relevant
interest in the building would effectively “stand in the shoes” of the person
who had disposed of his interest, and so would effectively be entitled to
the same amount of WDAs as the previous owner.

Proposed revisions
13. This measure:

• provides that Parts 3 and 4 of CAA are repealed with effect from
1 April 2011 for corporation tax purposes and 6 April 2011 for income
tax purposes;
• gives the detailed rules on the phasing out of the WDAs for
expenditure on industrial and agricultural buildings for the transitional
periods to 31 March or 5 April 2011;
• withdraws EZAs in part 3 through the repeal of Part 3 with effect from
1 April 2011 for corporation tax purposes and 6 April 2011 for income
tax purposes, but balancing charges, in respect of qualifying enterprise
zone expenditure, under sections 314 or section 328 of CAA, will be
retained for a limited period;
• introduces an anti-avoidance provision, counteracting disclosed
schemes aimed at exploiting the legislation withdrawing balancing
adjustments and the recalculation of balancing allowances in FA 2007,
in order to claim multiple WDAs.
Phasing-out rules
14. For the transitional periods

• between 1 April 2008 and 31 March 2011 (for businesses within the
charge to corporation tax) or
• between 6 April 2008 and 5 April 2011 (for businesses within the
charge to income tax)
the basic calculation of the amount of IBA and ABA WDAs will be
unchanged (subject to the effective withdrawal of balancing adjustments
and the recalculation of WDAs in respect of balancing events occurring on
or after 21 March 2007: see paragraphs 11 and 12). The amount of the
WDA (whether original or recalculated) is to be stepped down by
25 per cent for each financial or tax year.
15. For those transitional chargeable periods the amount of WDA is the
percentage of the WDA shown in column 3 of the following table:
Financial year
beginning 1 April 2007 Tax year 2007-08 and
100 per cent
and earlier financial earlier tax years
years
Financial year
Tax year 2008-09 75 per cent
beginning 1 April 2008
Financial year
Financial year
Financial year

16. Where the chargeable period of a business falls in more than one financial
or tax year, the WDA is to be apportioned on a strict time basis between
the financial or tax years in order to determine the amount of the
writing-down allowance that may be set-off against profits.
Enterprise zone allowances
17. The amount of any initial allowance will not be restricted provided it relates
to qualifying capital expenditure incurred by the EZA claimant on or before
31 March 2011 (for corporation tax) or on or before 5 April 2011 (for
income tax). However, where a business’s chargeable period spans the
relevant date and the claimant claims a WDA, the amount of the WDA will
be restricted on a time basis.
18. For EZAs, the measure will also provide that where a business disposes of
a building within seven years of first use, in respect of which either an
initial allowance or WDA(s) have been claimed, then the business will
potentially be liable to a balancing charge, notwithstanding the repeal of
Part 3 of CAA with effect from 1 April 2011 (corporation tax) or
6 April 2011 (income tax). Furthermore the special rules in sections 327 to
331 of CAA relating to certain capital value realisations will continue to
have effect on after 1 or 6 April 2011.
Anti-avoidance rule
19. Finance Bill 2008 will also include an anti-avoidance rule that will limit the
amount of a WDA on a time-apportioned basis, where property qualifying
for IBAs is transferred or sold between connected parties and the purpose,
or one of the main purposes, of the sale or transfer is the obtaining of a tax
advantage.
Draft legislation
20. Draft legislation and explanatory notes have been published today on the
HM Revenue & Customs website.
Further advice
21. If you have any questions about this change, please contact Joy Guthrie
on 020 7147 2610 (email: Joy.Guthrie@hmrc.gsi.gov.uk) or Malcolm Smith
on 020 7147 2555 (email: Malcolm.Smith3@hmrc.gsi.gov.uk). Information

BN07
CAPITAL ALLOWANCES: PLANT AND MACHINERY

ALLOWANCES: INTEGRAL FEATURES AND THERMAL
INSULATION
1. Businesses investing in certain assets.
2. Legislation will be introduced in Finance Bill 2008 to provide a new

classification of “integral features” of a building, expenditure on which will
be allocated to the new special rate pool (BN08) and will attract writing
down allowances (WDAs) at 10 per cent a year. This new classification
will be effected by means of a short list of the integral features affected.
The legislation will also provide that when the whole or the majority of a
defined “integral feature” is replaced, that expenditure will also be
allocated to the special rate pool. This change is part of the business tax
reform package announced at Budget 2007.
3. The new classification will also include two features of a building that have
environmentally beneficial qualities, which would not normally qualify for
plant and machinery allowances. In addition, allowances for the thermal
insulation of existing industrial buildings will be extended to expenditure on
the thermal insulation of all existing buildings, used for any qualifying
business purpose, other than residential property businesses. However,
allowances on all such thermal insulation will, in future, be restricted to the
new 10 per cent rate, in place of the 25 per cent rate that currently applies
to the thermal insulation of existing industrial buildings.
Operative date
4. These changes will have effect in respect of expenditure incurred on or

after 1 April 2008 for businesses within the charge to corporation tax and
6 April 2008 for businesses within the charge to income tax.
5. Capital allowances allow business to write off the costs of capital assets,
such as plant and machinery, against their taxable income. They take the
place of commercial depreciation, which is not allowed for tax. On and
after 1 April 2008 (for corporation tax), or 6 April (for income tax), the rate
of WDA will be 20 per cent per annum for general plant and machinery,
and 10 per cent per annum for “special rate” plant and machinery (BN08),
both on a reducing balance basis.

6. From 1 April 2008 (for corporation tax), or 6 April 2008 (for income tax),
expenditure on certain “integral features”, as described in a short list, will
attract the 10 per cent “special rate” of WDAs. These assets are:
• electrical systems (including lighting systems);
• cold water systems;
• space or water heating systems, powered systems of ventilation, air
cooling or air purification, and any floor or ceiling comprised in such
systems;
• lifts, escalators, and moving walkways;
• external solar shading; and
• active facades.
7. The legislation will also provide that, on and after the operative date (in
paragraph 4) the 10 per cent “special rate” of WDAs will have effect for
both initial and replacement expenditure on the designated integral
features, preventing a revenue deduction in those cases where this might
otherwise have been claimed. For this purpose, “replacement expenditure”
is defined as expenditure incurred where either the whole, or more than 50
per cent of the integral feature is replaced in a 12-month period. The
“more than 50 per cent” test will be determined by reference to the
replacement cost of the asset when expenditure is first incurred within the
12-month period in question.
8. Currently, WDAs at 25 per cent a year are available for expenditure on

adding thermal insulation to an industrial building. From 1 April 2008
(corporation) tax or 6 April 2008 (income tax) WDAs will be extended to
expenditure on the thermal insulation of all existing buildings, used for any
qualifying business purpose, other than residential property businesses.
However, allowances on all such thermal insulation will, in future, be
restricted to the new 10 per cent rate.
9. The detailed design of the new integral features classification was included
in a formal consultation launched in July 2007 and draft legislation was
published in a technical note in December 2007. The draft legislation
relating to replacement expenditure on integral features will be included in
Finance Bill 2008.
Further advice

BN08
CAPITAL ALLOWANCES: PLANT AND MACHINERY: RATE

CHANGES & NEW SPECIAL RATE POOL
1. Businesses investing in plant and machinery.
2. Legislation will be introduced in Finance Bill 2008 to reduce the main rate
of writing-down allowances (WDAs) for new and unrelieved expenditure on
general plant and machinery (including cars) allocated to a pool from
25 per cent to 20 per cent. This change is part of the business tax reform
package announced at Budget 2007.
3. The legislation will also increase the rate of WDA on long-life assets from
6 per cent to 10 per cent. Any unrelieved expenditure in the long-life asset
class pool will, for chargeable periods starting on or after the operative
date, be allocated to a new, 10 per cent “special rate” pool. Long-life asset
pools will cease to exist for all accounting periods starting on or after the
operative date.
Operative date
4. The measure has effect for the calculation of WDAs for chargeable periods
ending on or after 1 April 2008 for businesses within the charge to
corporation tax and on or after 6 April 2008 for businesses within the
charge to income tax.
place of commercial depreciation, which is not allowed for tax. The general
rate of plant and machinery WDA is currently 25 per cent per annum on a
reducing balance basis. For expenditure on long-life assets the rate of
plant and machinery WDA is currently 6 per cent per annum on a reducing
balance basis.
Main rate of writing-down allowance (WDA)
6. The main rate of WDA will be reduced from 25 per cent to 20 per cent from
1 April 2008 (corporation tax) or 6 April 2008 (income tax). The rate
changes have effect from a fixed date, so for those businesses where the
chargeable period spans the change date a hybrid rate will have effect for
the whole of that transitional chargeable period.

New special rate pool WDA
7. On and after 1 April 2008 (corporation tax) or 6 April 2008 (income tax) a
new special rate pool will be introduced. With effect from those dates,
expenditure on long-life assets, thermal insulation and integral features
(see BN07) will be allocated to the new special rate pool and the rate of
WDA applicable to that pool will be 10 per cent per annum on a reducing
balance basis.
Long-life asset pool: transitional provisions
8. Where the chargeable period of a business begins on 1 April 2008

(corporation tax) or 6 April 2008 (income tax) any unrelieved expenditure
in the long-life asset pool immediately before those dates will be
transferred to the new special rate pool and will qualify for 10 per cent
WDAs. However, when the chargeable period of a business spans those
operative dates, the following transitional provisions will have effect -
• no new expenditure incurred on or after 1 (or 6) April 2008 is to be
allocated to the long-life asset pool – it must be allocated to the special
rate pool;
• a hybrid rate will have effect for existing expenditure in the long-life
asset pool for the whole of the that transitional chargeable period and
• at the start of the next chargeable period, all unrelieved expenditure in
the long-life asset pool will be transferred to the new special rate pool.
Hybrid rate
9. For businesses whose chargeable period spans 1 April (corporation tax) or

6 April 2008 (income tax) a hybrid rate will have effect for unrelieved
expenditure in any pool, including single asset pools. There will be two
hybrid rates:
• one for any expenditure that qualifies for the current 25 per cent WDA;
and
• the other for any expenditure that qualifies for the current 6 per cent
WDA.
10. The hybrid rate is arrived at by calculating the proportion of a chargeable

period falling before the change date and the corresponding proportion
falling after the change date. For example, if a company’s chargeable
period began on 1 January 2008 and ends on 31 December 2008, one
quarter of that period would fall before the date of the change (on 1 April
2008) and three-quarters would fall after that date. The calculation of the
hybrid rate on the main rate of WDAs would therefore be as follows:
91/366 x 25% = 6.22%

Plus 275/366 x 20% = 15.03%
Therefore, hybrid rate for transitional period = 21.25%
Ready reckoner
11. The calculation of the hybrid rate is intended to be straightforward, but to

further simplify the calculation, HMRC will provide a ready reckoner to
assist businesses in calculating the hybrid rate for any chargeable period
affected by the transitional provisions.

Further advice

BN09
NORTH SEA FISCAL REGIME
1. Oil and gas companies that operate in the UK or on the UK Continental

Shelf.
2. Legislation will be included in Finance Bill 2008 to give companies greater

access to corporation tax (CT) and Petroleum Revenue Tax (PRT) relief
for the costs of decommissioning North Sea infrastructure. This will be
achieved by extending the period in which CT losses can be carried back,
extending the post-cessation period in which costs can be claimed for CT
purposes and extending the scope for PRT relief where companies are
called upon to meet such costs as a result of a default by another
company.
3. Fields that are never going to be liable for PRT will be able to elect to
come out of the PRT regime. There will also be a simplification of the PRT
returns regime to reduce the level of information companies have to
provide.
4. Capital allowances rules will change to provide 100 per cent first-year
allowances for new expenditure on long-life assets and mid-life
decommissioning. Existing long-life assets will get the same 10 per cent
writing down allowance as is proposed for non-oil and gas production
assets (see BN08).
Operative date
5. As there are a number of proposed changes, there are range of operative

dates:
• the decommissioning changes have effect respectively for CT losses
incurred in accounting periods beginning on or after 12 March 2008; for
ring fence CT trades that cease on or after 12 March 2008; and for
PRT default expenditure incurred on or after 30 June 2008;
• elections to come out of the PRT regime may be submitted on or after
the date Finance Bill receives Royal Assent;
• the changes to the reporting requirements for simplified PRT returns
will have effect for chargeable periods ending on or after 30 June 2008;
and
• the capital allowances changes will have effect for expenditure incurred
on or after 12 March 2008.

6. Under the current law as it relates to decommissioning:

• companies can carry decommissioning losses back three years;
• after their ring fence trade has ceased, companies can only get tax
relief for decommissioning costs incurred within three years of the trade
ceasing; and
• where a company is liable to meet decommissioning costs in respect of
a field and defaults on its obligation, companies that have previously
operated in that field can be held liable for the costs. In such a
situation, no relief is available for PRT purposes for those companies
meeting the cost because of the default of others.
7. Under the current law as it relates to the operation of PRT:

• even if a field will never be liable to PRT, because of the allowances
available to it, the field remains within the PRT regime and has certain
reporting obligations; and
• companies are required to return to HM Revenue & Customs (HMRC)
details of all sales of oil to enable HMRC to have sufficient information
to calculate a market value for non-arm’s length sales.
8. Under the current law as it relates to the capital allowances regime for
assets used for the purposes of oil and gas production in the North Sea:
• expenditure on long-life assets (those with a useful economic life of
25 years or more) and expenditure on decommissioning which is not
part of a programme of abandonment of the field (so-called ‘mid-life
decommissioning), do not qualify for the 100 per cent first-year
allowances which applies to other capital spending in oil and gas
production in the UK Continental Shelf; and
• long-life assets receive 24 per cent allowances in the first year and
6 per cent thereafter. Mid-life decommissioning receives 25 per cent
allowances on a reducing balance basis.
9. The new rules for decommissioning will:

• allow companies to carry back decommissioning costs to 17 April 2002,
the date of the introduction of the supplementary charge for profits from
oil and gas production in the UKCS;
• provide for companies to claim the post-cessation costs of
decommissioning fields for tax purposes until such time as the
decommissioning has been properly completed; and
• provide PRT relief where an ex-participator in a field is obliged to meet
decommissioning costs in a field because of default by a current
participator.
10. The new rules for the operation of PRT will:

• allow companies to elect to come out of the PRT regime on the basis
that such fields will not become liable to PRT, because of the level of
allowances available, for the rest of the life of the field. Companies will
have to provide information in support of the election with the final
decision resting with HMRC; and
• only require companies to make returns to HMRC of details of sales of
certain types of oil, what is referred to in the legislation as Category 2
oil.

11. The new rules for capital allowances for assets used for the purposes of oil
and gas production in the UKCS will:
• extend the 100 per cent allowances regime to new expenditure on long
life assets and mid-life decommissioning; and
• increase the rate of writing down allowances for existing long life
assets from 6 per cent to 10 per cent, in line with the wider capital
allowances changes announced today (see BN08).
Further advice
12. If you have any questions about this change, please contact Mike Crabtree
on 020 7438 6576 (email: mike.crabtree@hmrc.gsi.gov.uk) or Paul Philip
on 020 7438 6993 (email: paul.philip@hmrc.gsi.gov.uk). Information about
Budget measures is available on the HM Revenue & Customs website at
www.hmrc.gov.uk

BN10
100 PER CENT FIRST-YEAR CAPITAL ALLOWANCES FOR

NATURAL GAS, BIOGAS AND HYDROGEN REFUELLING
EQUIPMENT
1. Businesses planning to purchase equipment for refuelling vehicles with

natural gas, biogas or hydrogen fuel.
2. The 100 per cent first-year allowance (FYA) for expenditure incurred on
natural gas and hydrogen refuelling equipment due to end on 31 March
2008 will be extended for an additional five years to 31 March 2013. Its
scope has also been extended to include refuelling equipment for biogas.
Operative date
3. The measure will have effect for expenditure incurred on or after

1 April 2008.
4. Business expenditure on plant and machinery normally qualifies for tax

relief as capital allowances, which on and after 1 April 2008 are given at
the rate of 20 per cent a year on a reducing balance basis.
5. A scheme exists that gives 100 per cent FYAs to businesses that
purchase equipment required to refuel natural gas and hydrogen powered
vehicles. This scheme is due to end on 31 March 2008.
6. Legislation will be introduced in Finance Bill 2008 to extend this scheme

for five years, to 31 March 2013, and on and after 1 April 2008 extend its
scope to include biogas refuelling equipment for vehicles. Biogas is a non-
fossil fuel substitute for natural gas.
Further advice
7. If you have any questions about this change, please contact Nick Williams
on 020 7147 2541 (email: nicholas.williams@hmrc.gsi.gov.uk). Information

BN11
100 PER CENT FIRST-YEAR ALLOWANCES FOR

EXPENDITURE ON CARS WITH LOW CARBON DIOXIDE
EMISSIONS.
1. Businesses that purchase new, unused (not second hand) low carbon
dioxide (CO2) emission cars or lease low CO2 emission cars.
2. The 100 per cent first-year allowance (FYA) for expenditure on cars with
CO2 emissions not exceeding 120g/km is due to end on 31 March 2008.
Legislation will be introduced in Finance Bill 2008 to:
• extend the scheme for an additional five years until 31 March 2013;
• reduce the qualifying emissions threshold so that only expenditure
on cars with CO2 emissions not exceeding110g/km driven will
attract the 100 per cent FYA; and
• introduce a transitional rule to ensure that any leasing contracts
entered into before 1 April 2008 involving cars which qualified as
low emissions cars under the old rules are unaffected by the
reduction of the qualifying CO 2 emissions limit to 110g/km and
below.
Operative date
3. This measure will have effect for expenditure incurred on or after

1 April 2008.
place of commercial depreciation, which is not an allowable deduction in
computing profits for tax purposes. On and after 1 April 2008 the general
rate of plant and machinery writing down allowance (WDA) will be 20 per
cent per annum on a reducing balance basis.
5. 100 per cent first-year allowances (FYAs) bring forward the time tax relief is
available by enabling a business to claim relief on the full cost of an asset
against its profits for the year in which the investment is made.
6. A scheme exists that gives 100 per cent FYAs to all businesses that
purchase new cars with CO2 emissions not exceeding 120g/km driven.
The scheme is due to end on 31 March 2008. This measure will extend the
scheme for an additional five years to 31 March 2013.

7. The definition of a qualifying low CO2 car will also be amended. For
expenditure incurred on or after 1 April 2008 the applicable CO2 emissions
threshold will be reduced from not exceeding 120g/km driven to not
exceeding 110g/km driven.
8. Low emission cars are not subject to the special rules for cars costing over
£12,000. So it has been necessary to introduce a transitional rule to
ensure that lessees who have entered into contracts to lease cars that
currently qualify as low CO2 emission cars do not find mid lease, that as a
result of the change to the definition of a low CO2 emissions car, their cars
no longer qualify as such.
9. This rule will ensure that payments on leases in existence on

31 March 2008 for cars costing over £12,000 with CO2 emissions above
the new threshold but below the current threshold (i.e. between 110g/km
and 120g/km) are not subject to the LRR for the period on and after
1 April 2008 until the expiry of the lease.
Further advice
10. If you have any questions about this change, please contact Annie Carney
on 020 7147 2603 (email: annie.carney@hmrc.gsi.gov.uk). Information

BN12
CAPITAL ALLOWANCES: PLANT AND MACHINERY: ANNUAL

INVESTMENT ALLOWANCE
1. Businesses investing in plant and machinery.
2. Legislation will be included in Finance Bill 2008 to introduce a new annual

investment allowance (AIA) for the first £50,000 of a business’s
expenditure on most plant and machinery each year. This change is part
of the business tax reform package announced at Budget 2007.
3. The new AIA will be available to:

• any individual carrying on a qualifying activity (this includes trades,
professions, vocations, ordinary property businesses and individuals
having an employment or office);
• any partnership consisting only of individuals; and
• any company (subject to the limitations described below).
Operative date
4. The measure will have effect for expenditure incurred on or after

1 April 2008, for businesses within the charge to corporation tax, and on or
after 6 April 2008, for businesses within the charge to income tax.
of writing down allowances (WDAs) will be 20 per cent per annum for
general plant and machinery, and 10 per cent per annum for “special rate”
plant and machinery, (see BN08), both on a reducing balance basis.
6. On or before 31 March 2008 (for companies) or 5 April 2008 (for

unincorporated businesses), small and medium-sized enterprises (SMEs)
can continue to claim a first-year allowance (FYA) on certain expenditure
on plant or machinery. For expenditure incurred on or before those dates,
the FYA rate for small enterprises is 50 per cent and for medium-sized
enterprises the rate is 40 per cent of the expenditure incurred. The SME
first-year allowance will no longer be available for any expenditure incurred
on or after 1 April (corporation tax) or 6 April 2008 (income tax).

7. On and after 1 April 2008 (corporation tax) or 6 April 2008 (income tax)
most businesses, regardless of size, will be able to claim the new AIA on
the first £50,000 spent on plant or machinery (subject to the exclusions set
out in paragraphs 18-19). Businesses will be able to claim the AIA in
respect of expenditure on long-life assets and integral features (see
BN07), as well as on general plant and machinery.
8. Where businesses spend more than £50,000 in any chargeable period,

any additional expenditure will be dealt with in the normal capital
allowances regime, entering either the special rate or main pool, where it
will attract WDAs at the appropriate rate, (see BN08).
9. Where a business has a chargeable period which is more or less than a

year, the maximum allowance is proportionately increased or reduced.
However, where a business has a chargeable period that spans
1 April 2008 (corporation tax) or 6 April 2008 (income tax) the maximum
allowance is calculated as if the chargeable period began on either 1 or
6 April 2008 (as the case may be) and ended at the end of the chargeable
period. So, for example, a company with a chargeable period from
1 January 2008 to 31 December 2008 would calculate its maximum
entitlement to an AIA for that chargeable period based on the period from
1 April 2008 to 31 December 2008. Its maximum allowance for the
transitional period would therefore be 9/12 x £50,000 = £37,500.
10. The AIA complements and does not replace any of the existing
100 per cent FYA schemes. Similarly, expenditure that qualifies for
100 per cent allowances under separate capital allowances codes (for
example, Research & Development Allowances or Business Premises
Renovation Allowances) will be unaffected by the introduction of the AIA.
Targeting the AIA
Companies
11. Companies that fall within the company law definition of a group are legally
and economically inter-dependent and will therefore receive a single
allowance per group. Where a person, or persons together, control a
singleton company, but do not control any “related” company each such
company will be entitled to its own AIA.
Individuals and partnerships
12. Where an individual or individuals control(s) an unincorporated business or

more than one unincorporated business, but he/she/they do not control a
“related” unincorporated business, each separate and distinct business will
be entitled to its own AIA.
“Related” companies and businesses
13. The rules on “related” companies and businesses under common control
will only have effect for a very small minority of businesses. Most people
do not control a multiplicity of related businesses, and so will not be
affected by these rules. The rules will only have effect where a person (or

persons) control(s) a company or unincorporated business in their own
right. The wider “connected persons” and “associated company” rules are
not relevant for the purposes of determining an entitlement to AIA.
14. Where a person or persons control(s) one or more unincorporated

businesses or companies, (but not a combination of the two, as the
entitlement to an AIA for companies is considered totally separately from
that for unincorporated businesses, and vice versa) then the entitlement to
one or more AIA will depend on whether either “the shared premises” or
“similar activities” condition is met. If either of the conditions is met then
the companies, or as the case may be, the unincorporated businesses will
be “related” and so only entitled to a single AIA between them.
15. For businesses under common control, the two conditions are considered
on a financial year basis for companies and on a tax year basis for
unincorporated businesses:
• The “shared premises” condition has effect, if in a tax or financial year
(as the case may be), at the end of the chargeable period for one or
both of the businesses the activities are carried on from the same
premises.
• The “similar activities” condition has effect, if in a tax or financial year
(as the case may be), at the end of the chargeable period for one or
both of the businesses, more than 50 per cent of each business’s
activities (measured by turnover) are within the same “NACE
classification”.
16. The “NACE classification” is the common statistical classification of

economic activities in the European Union established by Regulation (EC)
No 1893/2006 of the European Parliament and the Council of
20 December 2006 and is generally accepted as a convenient way of
classifying activities into a common structure. Some general background
and a description of the first level of statistical classification that will have
effect for AIA purposes is available on the Office of National Statistics’.
Freedom of allocation for groups and “related” businesses
17. In addition to the freedom to allocate the AIA between different types of
plant and machinery expenditure mentioned in paragraph 7, groups of
companies and “related” companies, individuals and partnerships will be
free to allocate their AIA between businesses as they see fit.
Exclusions
18. The AIA will have effect for most plant and machinery expenditure, but
certain exceptions that apply to FYAs (SME FYAs are mentioned earlier at
paragraph 6) will continue to have effect for the purposes of the AIA. The
main exception is expenditure on cars. However, unlike SME FYAs, the
AIA will be available for expenditure on long-life assets and assets for
leasing.

19. Furthermore the AIA will not be available where transactions are entered
into where the main purpose or one of the main purposes is to enable a
person to obtain an annual investment allowance to which they would not
otherwise have been entitled.
Further advice

BN13
ENHANCED CAPITAL ALLOWANCES FOR ENERGY

EFFICIENT AND WATER SAVING
(ENVIRONMENTALLY-BENEFICIAL) TECHNOLOGIES
1. Businesses purchasing designated plant and machinery which is energy

efficient, reduces water use or improves water quality.
2. The Energy Efficient and Water Saving (environmentally-beneficial)

Enhanced Capital Allowance (ECA) schemes allow businesses investing
in designated technologies that reduce energy consumption, save water or
improve water quality to write off 100 per cent of the cost against the
taxable profits of the period during which the investment was made.
3. This measure will add to the List of technologies covered by the schemes.
Operative date
4. The changes to the schemes will have effect on and after a date to be
appointed by Treasury order to be made prior to the Summer 2008
Parliamentary recess.
5. Capital expenditure by business on plant and machinery normally qualifies

for tax relief by way of capital allowances, which on and after 1 April 2008
will be given at the rate of 20 per cent a year on a reducing balance basis.
6. Two schemes exist that give 100 per cent first year allowances for
expenditure on certain energy-saving and water technologies. Following
the annual review of the qualifying technologies, the schemes will be
revised. These revisions will be made by Treasury order.
7. The qualifying technologies are published in Lists: the Energy Technology

Criteria List and the Water Technology Criteria List which every year are
reviewed by Defra to ensure that the qualifying technologies, and the
criteria that technologies must meet if they are to qualify for the relief, are
still relevant.
8. Following this year’s review, the Water Technology Criteria List will be
revised to include one new technology: waste water recovery and reuse
systems. The Energy Technology Criteria List will be revised to include
four additional sub-technologies: compressed air master controllers;
compressed air flow controllers; heat pump dehumidifiers and white LED
lighting. Housekeeping changes will also be made to existing criteria.

9. At Budget 2007, the Government announced that it would review the
qualifying criteria for the good quality Combined Heat and Power
technology within the Energy Efficient Technologies scheme, to ensure
that it included all the necessary equipment to enable such facilities to use
solid refuse waste as a fuel. That work is now complete and steps will be
taken to revise the qualifying criteria at the same time as the other
changes.
10. All revisions will be incorporated in new Lists which will be published later
in 2008. Once these have been published a Treasury Order will link them
to the schemes. The lists are available on the internet at www.eca.gov.uk
Further advice
11. If you have any questions about this change, please contact Nick Williams,
on 020 7147 2541 (email: nicholas.williams@hmrc.gsi.gov.uk). Information

BN14
CAPITAL ALLOWANCES: INTRODUCTION OF FIRST-YEAR

TAX CREDITS
1. Companies within the charge to corporation tax that make a loss in a

period in which they invest in certain designated energy-saving or
environmentally-beneficial plant & machinery.
2. Legislation will be introduced in Finance Bill 2008 to enable loss-making

companies to surrender losses attributable to 100 per cent first-year
allowances (enhanced capital allowances) on designated energy-saving or
environmentally-beneficial plant and machinery in exchange for a cash
payment (a first-year tax credit) from Government. This change is part of
the business tax reform package announced in Budget 2007.
Operative date
3. Companies will be able to claim first-year tax credits in respect of

qualifying expenditure incurred on or after 1 April 2008.
4. Section 52 of the Capital Allowances Act 2001 (CAA) entitles a person to

claim a first-year allowance (FYA) in respect of qualifying expenditure on
plant and machinery, the rate of which depends on the type of
expenditure. Enhanced capital allowances (ECAs) are 100 per cent FYAs
available to businesses that invest in certain qualifying ‘green’ plant and
machinery.
5. The effect of a 100 per cent FYA is that the full cost of the plant and
machinery incurred in a period may be deducted in computing the taxable
profits of a business for that period. The new rules will expand this ECA
regime and allow companies within the charge to corporation tax to
surrender tax losses attributable to certain ECAs for a cash payment from
Government (a first-year tax credit).
6. A company will be able to surrender tax losses from a trade, an ordinary

property business, an overseas property business, a furnished holiday
lettings business or from managing the investments of a company with
investment business. The losses that may be surrendered will be those
attributable to ECAs claimed on energy-saving (as defined in section 45A
of CAA) or environmentally-beneficial plant and machinery (as defined in
section 45H of CAA). Plant and machinery attracts ECAs if it appears on
one of the product or criteria lists issued and maintained by the Secretary
of State for Department for Environment, Food and Rural Affairs (Defra).

7. A company will receive a first-year tax credit of 19 per cent of the loss
surrendered, although this is subject to an upper limit. The upper limit of
the tax credit will be the greater of:
• the total of the company’s PAYE and National Insurance
Contributions (NICs) liabilities for the period for which the loss is
surrendered; or
• £250,000.
8. A loss may only be surrendered for a first-year tax credit if it has not been
otherwise relieved. Where the loss could be used by the company to
off-set its own other taxable profits in the same period or surrendered as
group relief then it may not be surrendered for a first-year tax credit. Any
losses available to carry forward will be reduced by the amount of the loss
that has been surrendered under the new rules.
9. A company must claim first-year tax credits in a return or amended return.

As part of the claim a company must provide:
• a description of the ECA qualifying plant and machinery; and
• the amount of expenditure on this plant and machinery; and
• the date on which the expenditure was incurred.
Where the plant and machinery is of a type that requires certification by
Defra under section 45B or 45I of CAA in order to qualify for ECAs then
the certificate must also be enclosed with the claim.
10. The new rules will contain a mechanism for clawing back first-year tax
credits when the ECA qualifying plant and machinery is sold within the
claw-back period. This period begins on the date the expenditure was
incurred and ends four years after the end of the period for which the tax
credit was paid.
11. A Payable Enhanced Capital Allowances technical note was issued on

17 December 2007 and is available on HM Revenue & Customs website.
Further advice
12. If you have any questions about this change, please contact Sue Pennicott
on 020 7147 2627 (e-mail: sue.pennicott@hmrc.gsi.gov.uk). Information

BN15
CAPITAL ALLOWANCES: SMALL PLANT AND MACHINERY

POOLS
1. Businesses investing in plant and machinery, particularly small and micro

businesses whose future expenditure on plant and machinery may be fully
relieved by the annual investment allowance (AIA) (see BN12), but which
have small historic pools of unrelieved expenditure, or businesses that
may acquire such small pools in future.
2. Legislation will be introduced in Finance Bill 2008 to allow businesses to

claim a plant and machinery writing-down allowance (WDA) of up to
£1,000 where the unrelieved expenditure in the main pool or the new
special rate pool (see BN08) is £1,000 or less. This is in response to
comments made by business in consultation on the proposal to introduce
the new AIA (see BN12) which is part of the business tax reform package
announced at Budget 2007.
3. The measure will be a permanent feature of the plant and machinery code
and will have effect for both the main 20 per cent pool and the special rate
10 per cent pool. It will provide a significant administration burden saving,
especially to small and micro businesses, as businesses will no longer
have to calculate WDAs on very small balances for many years, as would
have been required under the current rules.
4. However, the measure will not have effect for any expenditure in ‘single
asset’ pools as they have special rules that bring them to an end at a
specified time.
Operative date
5. The measure will have effect for chargeable periods beginning on or after
1 April 2008 for businesses within the charge to corporation tax and on or
after 6 April 2008 for businesses within the charge to income tax.
of WDA will be 20 per cent per annum for general plant and machinery,
and 10 per cent per annum for “special rate” plant and machinery (BN08),
both on a reducing balance basis.

7. In general, WDAs are calculated on the amount by which the “available
qualifying expenditure” (AQE) exceeds the total disposal receipts (TDR) to
be brought into account in that pool for that period. When calculating
WDAs there is no de minimis rule so, for example, businesses with £1,000
of unrelieved expenditure and no new expenditure or disposal receipts
would have to carry on calculating the annual writing down allowance for
many years, even if the business may, for example, have scrapped the
asset that gave rise to the allowances in the first place.
8. Legislation to be introduced in Finance Bill 2008 will enable businesses to

claim a WDA of up to £1,000 in the case of each pool, once the unrelieved
expenditure (or AQE minus TDR) in either the main rate pool and/or the
special rate pool is £1,000 or less. Businesses do not have to claim the
maximum allowance in respect of the balance in their small pools.
Businesses with a main or special rate pool of £1, 000 or less can claim
less than the whole residue if they prefer. This ensures that very small
unincorporated businesses will not be disadvantaged by being required to
take the full allowance immediately.
Further advice

BN16
VENTURE CAPITAL SCHEMES
1. Investors under the Enterprise Investment Scheme (EIS), the Corporate

Venturing Scheme (CVS) and the Venture Capital Trust (VCT) scheme,
companies which qualify to attract investment under those schemes, and
venture capital trusts themselves.
2. Subject to State aid approval of this change by the European Commission,

the limit on the amount invested on which an investor can claim EIS
income tax relief in any one year will be increased from £400,000 to
£500,000.
3. In addition, the activities of shipbuilding and coal and steel production will
be excluded from all three schemes. Companies whose trade consists to
a substantial extent of those activities will not qualify under the schemes.
As a result, investors will not be able to receive tax relief under these
schemes for investments in companies carrying on any of those activities.
Operative date
4. For EIS, the changes to qualifying activities will have effect for shares
issued on or after 6 April 2008, but the change to the investment limit can
only have effect once the European Commission has given approval.
When State aid approval is received, the new limit will be brought into
force but will have effect on and after 6 April.
5. For CVS, the changes to the qualifying activities will have effect for shares
issued on or after 6 April 2008.
6. For VCTs, the changes to the qualifying activities will have effect for
money raised on or after 6 April 2008 (but not for money derived from the
investment of money raised before that date).
EIS income tax relief and investment limit
7. The limit on the amount on which an individual can receive EIS income
tax relief is currently in section 158(2) of Income Tax Act 2007 (ITA).
8. Legislation will be introduced in Finance Bill 2008 to raise this limit, but the
changes will only have effect when a Treasury order is laid, following State
aid approval of the change.

Qualifying activities
9. The venture capital schemes are intended to support investment in

smaller, higher-risk, trading companies. Most trades qualify under the
schemes, but not those that consist to a substantial extent of listed
‘excluded activities’.
10. These excluded activities are listed in the relevant legislation (for EIS –
section 192 of ITA; for VCTs – section 303 of ITA and for CVS –
paragraph 26 of Schedule 15 to Finance Act 2000). Where necessary,
more detailed explanation and definitions follow the list.
11. The proposed changes would, in each case, add three new activities –
shipbuilding, coal production and steel production – to the list, together
with definitions. The definitions are based on those provided by the
European Commission, for State aid purposes.
Further advice
12. If you have any questions about these changes, please contact David
Harris on 020 7147 2562 (email: david.harris@hmrc.gsi.gov.uk), or
Richard Kent on 020 7147 2635 (email: richard.kent@hmrc.gsi.gov.uk).

BN17
COMMUNITY INVESTMENT TAX RELIEF AND BANKING
1. Banks and Community Development Finance Institutions (CDFIs).
2. This measure will have effect for banks that invest in an accredited CDFI
under the Community Investment Tax Relief (CITR) scheme (‘the
scheme’) and that also act as banker to the CDFI.
3. Legislation will be introduced in Finance Bill 2008 to ensure that any

deposits from the CDFI to the bank that are made in the ordinary course of
its banking arrangements will not reduce the amount of CITR available to
the bank in respect of its investment.
Operative date
4. The change will be treated as always having had effect.
5. CITR is a tax relief given to individuals and companies that invest in CDFIs
that are accredited under the scheme. The amount of relief is linked to the
amount invested in the CDFI.
6. The scheme includes anti-avoidance rules such that, if the CDFI makes
payments, or otherwise returns value, to the investor during the year
preceding the investment, or the five years following it, the amount of relief
due to the investor is reduced.
7. These anti-avoidance rules are widely drawn. They apply to most

payments or transfers of value from CDFI to investors, with the exception
of specified “qualifying payments”.
8. Deposits by a CDFI into a bank with which it runs an account are not
“qualifying payments”. So if a bank invests in a CDFI under the scheme,
and the CDFI operates an account(s) with that same bank, deposits
represent a return of value under the value-received rules. Each deposit
effectively reduces the amount of the investment on which the bank can
claim CITR.

9. Legislation introduced in Finance Bill 2008 will carve out of the anti-
avoidance rules any deposits made by a CDFI in the course of its ordinary
banking arrangements to an investor that is a bank.
10. The change will be treated as always having had effect. This retrospection
is wholly relieving in its effect. It is intended to ensure any banks that have
previously invested in CDFIs under the scheme get the full benefit of that
investment.
Further advice
11. If you have any questions about this change, please contact Richard Kent
on 020 7147 2635 (email: richard.kent@hmrc.gsi.gov.uk). Information

BN18
ENTERPRISE MANAGEMENT INCENTIVES
1. Companies who wish to offer Enterprise Management Incentive (EMI)

share options to their employees.
2. To ensure compliance with EU State aid guidelines, legislation will be

introduced in Finance Bill 2008 to make two changes:
• EMIs will be limited to qualifying companies with fewer than 250
employees; and
• companies involved in shipbuilding, coal and steel production will no
longer qualify for EMI.
3. Regulations will be made to increase the individual employee limit on

grants of EMI qualifying options from £100,000 to £120,000.
Operative date
4. The EMI option grant limit increase will have effect in respect of options
granted on or after 6 April 2008 and the qualifying company changes will
have effect in respect of options granted on or after the date Finance Bill
2008 receives Royal Assent.
5. EMIs are tax and National Insurance Contributions (NICs) advantaged

share options available to small companies with gross assets not
exceeding £30 million, to help them recruit and retain employees. In
addition to the gross assets test, EMI is limited to companies or groups
which are independent and are not in one of the excluded trading activities
listed in Paragraphs 16 to 23 of Schedule 5 to the Income Tax (Earnings
and Pensions) Act 2003 (ITEPA). Furthermore, employees have to satisfy
a working time requirement to be granted an EMI share option. Currently,
employees cannot hold qualifying EMI options, taking into account
Company Share Option Plan options also granted to them, with a total
market value of more than £100,000 at date of grant.
6. To ensure EMI continues to meet the EU State aid guidelines, legislation

to be included in Finance Bill 2008 will make two changes to the EMI
legislation in Schedule 5 to ITEPA. Firstly, it will insert an additional test to
limit EMI to companies with fewer than 250 full-time employees. If a
company has part-time employees, the full-time equivalent number of
these can be calculated by adding to the number of full-time employees a
just and reasonable fraction for each part time employee.

7. Secondly, the legislation will add shipbuilding, coal and steel production to
the list of excluded trades in the EMI legislation in Schedule 5 to ITEPA.
8. The qualifying company changes will have effect in respect of EMI share
options to be granted on or after the date Finance Bill 2008 receives Royal
Assent. The changes will not have effect in respect of qualifying EMI share
options already granted under the existing rules.
9. The change to the individual EMI option grant limit will have effect in
respect of options granted on or after 6 April 2008. This will allow
qualifying companies to grant new or additional qualifying EMI options to
their employees up to the new limit of £120,000.
Further advice
10. If you have any questions about this change, please contact Chris
Murricane on 020 7147 2818 or Ellie Mayor on 020 7147 2822 or by email
to shareschemes@hmrc.gsi.gov.uk. Information about Budget measures is

BN19
TRADING STOCK
1. Businesses that dispose of or appropriate goods from trading stock other

than in the course of trade and businesses that acquire or appropriate
goods into trading stock other than in the course of a trade.
2. Legislation will be introduced in Finance Bill 2008 to put on a statutory

basis a long established rule which has effect where goods are
appropriated into or from trading stock other than by way of trade. In such
circumstances, the profits of the trade for tax purposes should be adjusted
to replace the cost of the stock or the actual proceeds with their market
value.
Operative date
3. The measure will have effect for all transactions whereby goods are
appropriated into or from trading stock other than in the course of trade on
or after 12 March 2008.
4. Business profits for tax purposes are generally calculated in line with
Generally Accepted Accounting Practice (GAAP). This has a statutory
basis in section 42 of the Finance Act (FA) 1998 as amended by section
103(5) of the FA 2002.
5. However, section 42(1) of FA 1998 makes clear that this basic principle is
subject to ‘any adjustment required or authorised by law in computing
profits for those purposes’. In other words, tax law, either in statute or case
law, will take precedence in situations where it differs from accountancy
practice.
6. One example in which GAAP differs from tax law in this way is where
business stock is disposed of other than by way of a trading transaction.
Under GAAP, such a transaction should be credited to the accounts at
either the cost price of the stock or at the price actually paid on the
disposal. However, for tax purposes, the GAAP treatment is overridden
and the tax computation needs to be adjusted to reflect the appropriation
from stock at market value (the market value rule’). This rule has been in
place for many years.

7. The market value also has effect where goods are acquired or
appropriated into trading stock other than in the course of a trade.
8. Legislation will be introduced in Finance Bill 2008 to put the market value
rule on a statutory basis. Its effect will be to preserve the current tax
treatment of non-trade appropriations of goods into and from trading stock.
Further advice
10. If you have any questions about this measure, please contact Craig Mason
on 020 7147 2599 (email: craig.mason@hmrc.gsi.gov.uk) or Fiona
McRobert on 028 9093 9722 (email: Fiona.mcrobert@hmrc.gsi.gov.uk).

BN20
LEASED PLANT OR MACHINERY: ANTI-AVOIDANCE
1. Businesses leasing plant or machinery.
2. This measure will counter avoidance by businesses who lease in and

lease out the same plant or machinery to exploit differences in the way in
which lease rentals paid and received are taxed in order to generate a tax
loss where there is no commercial loss.
3. The measure will also counter avoidance involving leases of plant or

machinery which are granted in return for a capital payment, often
described as a premium, and similar arrangements, in circumstances
where the capital payment currently escapes taxation.
4. Minor changes will be made to the leased plant or machinery anti-

avoidance measure which was announced on 9 October 2007. The
changes will clarify the operation of the rules in a sale and finance
leaseback and introduce new rules to ensure that lease and finance
leaseback arrangements are treated in a similar way.
Operative date
5. The measure will generally have effect for transactions entered into on or
after 13 December 2007. Some aspects of the measure, as explained
below, will have effect on and after 12 March 2008.
Mismatched lease chains
6. A business may act as an intermediate lessor, leasing in plant or

machinery under one lease and leasing it out under another. Such leases
may be broadly similar but be designed to exploit differences in the way in
which leases are taxed. The avoidance involves arrangements which
allow the business, as lessee, to deduct all the lease rentals payable
under the lease but, as lessor, to be taxed on only a small portion of the
rentals receivable. This creates a tax loss where there is no commercial
loss.

7. Legislation to address this will be included in Finance Bill 2008. This will
ensure that rentals received by intermediate lessors will be taxed on the
same basis as rentals paid and that intermediate lessors are taxed on their
commercial profits.
Lease premiums
8. Businesses have been granting leases on plant or machinery for a

premium plus a small amount of annual rentals. The premium, which is
commercially broadly equivalent to the sale of the asset, escapes tax
because it is not brought in as a disposal receipt for capital allowances
purposes and little or no tax would be payable under the chargeable gains
regime.
9. This measure will ensure that, with the exceptions described below,
payments will be taxed as income of the lessor where they are not
otherwise taxable as income or as a capital allowances disposal receipt,
and which either:
• are made by or on behalf of the lessee to the lessor or to another
person on the lessor’s behalf and are paid in connection with the grant
of a lease or in other specified circumstances; or
• reduce the rentals otherwise payable under the lease.
10. Where payments are made on or before 11 March 2008, the new rules will
have effect only for payments made in respect of leases of plant or
machinery that are not leased with other assets.
11. Where payments are made on or after 12 March 2008 the rules will also
have effect for plant or machinery (other than fixtures) leased with other
assets but only to the extent that:
• it is reasonable to attribute the capital payment to that plant or
machinery; and
• if the payment were income, it would not be taxable under Schedule A.
12. These rules are designed to ensure that payments associated with typical
real property leases will not be affected by the measure.
13. In addition, the rules will not have effect for:

• payments made in connection with long funding leases where the
lessor is not entitled to claim capital allowances because of the effect
of section 34 of the Capital Allowances Act 2001 (CAA);
• contributions made by the lessee that reduce the lessor’s qualifying
expenditure for capital allowances purposes;
• indemnity payments made by the lessee to the lessor to compensate
the lessor for a loss arising as a result of damage to, or damage
caused by, the leased asset.
14. The measure will also counter attempts to reduce or avoid a disposal
value for capital allowances and chargeable gains purposes on the
granting of a long funding finance lease.

15. In each case, the disposal value is based on the value of the leased asset
as shown in the lessor’s balance sheet. This value can be reduced where
rentals are payable on the day the lease is entered into or where the
leased asset is linked to a corresponding liability, requiring the asset and
liability to be netted off.
16. This measure will ensure that the disposal value is not reduced where
rentals are receivable on the day on which the lease is granted. In
addition, where the lease is granted on or after 12 March 2008, the
measure will ensure that the disposal value is not reduced by matching the
leased asset with liabilities in a way that means the lessor’s net investment
in the lease is reduced or eliminated. From that date, the disposal value
will be determined on the basis that the lessor has no liabilities.
Sale and finance leaseback
17. The draft legislation published on 9 October 2007 provided that, in the
case of a sale and finance leaseback, the finance lease should not be
treated as a short lease. In most cases, this means it will be treated as a
long funding lease. There may be more than one finance lease in the
leaseback arrangements and, with effect on and after 12 March 2008, it
will be made clear that none of these finance leases should be treated as
a short lease, so no lessor in the leaseback arrangements is entitled to
claim capital allowances.
Lease and finance leaseback
18. The draft legislation published on 9 October 2007 made no special

provision for the taxation of the finance lease (or leases) in the leaseback
part of a lease and finance leaseback. With effect on and after
12 March 2008, it will be made clear that each finance lease in the
leaseback should not be treated as a short lease, so no lessor in the
leaseback arrangements is entitled to claim capital allowances.
19. Following the introduction of this measure, section 228B of CAA, which
restricts the amount that a lessee may deduct in a lease and finance
leaseback, only has effect in exceptional circumstances. Nevertheless,
with effect from 12 March 2008, an amendment will be made that will
ensure the rules have effect where the leaseback is to a person connected
to the head lessor.
Further advice
20. Draft legislation, covering mismatched lease chains and lease premiums,
was published on 13 December 2007.
21. If you have any questions about this change, please contact Paul Lane on
020 7147 2637 (email: paul.lane@hmrc.gsi.gov.uk). Information about
www.hmrc.gov.uk

BN21
FINANCIAL PRODUCTS AVOIDANCE: DISGUISED INTEREST

AND TRANSFERRING RIGHTS TO LEASE RENTALS
1. Large companies who enter into arrangements to avoid tax on returns

from investments that are economically equivalent to interest.
2. Companies leasing plant or machinery that sell the right to lease rental
income.
3. These measures address a number of avoidance schemes that have been

notified to HM Revenue & Customs under the disclosure rules introduced
in Finance Act (FA) 2004. Most involve arrangements that give rise to
amounts that in substance are interest but which are designed not to be
taxable as interest (“disguised interest”). One involves an arrangement
which aims to exploit existing legislation on disguised interest so as to
generate artificial losses.
4. Work will continue to develop a “principles-based”, or generic, approach to

ensuring that all such arrangements are taxed in the same way as interest,
with the intention of legislating in Finance Bill 2009. However, in order to
tackle immediate avoidance, legislation will be introduced in Finance Bill
2008 to block the following schemes:
a) Arrangements to avoid corporation tax by receiving interest in the
form of non-taxable distributions;
b) Arrangements as a result of which the charge to tax on interest is
reduced or eliminated by credits for overseas tax in circumstances
where no such tax is ever suffered;
c) Avoidance of corporation tax by the adoption of differing accounting
treatments within a group for convertible debt;
d) Arrangements where companies acquire partnership rights in
advance for an amount equal to the discounted value of the rights
so as to generate disguised interest;
e) Arrangements (previously dealt with by section 131 of FA 2004)
where companies that are members of partnerships obtain
disguised interest on partnership contributions by altering profit-
sharing ratios;
f) Schemes where attempts are made to exclude from the derivative
contracts legislation transactions that are designed to produce
disguised interest.
Legislation will also be introduced to stop schemes that are intended to

avoid or exploit the 2005 “shares as debt” rules in sections 91A and
91B of FA 1996 by means of:

g) Depreciatory transactions intended to create artificial losses;
h) Rates of interest said to be “uncommercial”;
i) Spreading disguised interest between two or more companies;
j) “Falsifying transactions” that without affecting the overall return are
said to prevent the legislation from applying;
k) Use of exit strategies that do not amount to exit arrangements for
the purpose of the shares as debt rules.
5. In addition, the measure will counter notified schemes that are intended to
allow lessors of plant or machinery to dispose of the right to taxable
income in exchange for a tax-free sum. The changes will ensure that
where the right to receive rentals is transferred the value receivable will be
taxed as income.
Operative date
6. The changes have effect in relation to the countermeasures on disguised

interest:
• for schemes (a), (b) and (f), credits that relate to any time on or
after 12 March 2008;
• for scheme (c) credits and debits that relate to any time on or after
12 March 2008;
• for schemes (d) and (e), returns that relate to any time on or after
12 March 2008;
• for scheme (g) debits that relate to any time on or after 12 March
2008;
• for schemes (h) to (k) shares held on 12 March 2008, but so that no
amounts are brought into account unless they relate to times on or
after 12 March 2008;.
7. Where the right to receive rentals under a lease of plant or machinery is

transferred, the measure will have effect where the arrangements to
transfer are entered into on or after 12 March 2008.
Disguised interest
8. In outline, the proposed changes will block the schemes as follows:

a) a company that receives interest which is treated for tax purposes
as a distribution will be taxable on the distribution if it arises in
connection with tax avoidance;
b) the entitlement to the tax credit under section 807A(3) of the
Income and Corporation Taxes Act 1988 (ICTA) will be removed by
its repeal;
c) where tax asymmetry arises because different accounting treatment
is adopted by holder and issuer in relation to intra-group convertible
debt, then the holder will be required to bring into account additional
credits to match the issuer’s debits;
d) and e) where the relevant conditions are met a company deriving
disguised interest from an interest in a partnership will be charged
to corporation tax on that return;
f) the derivative contract rules will be amended to ensure that where

derivative contracts whose underlying subject matter is shares are
designed to produce disguised interest, then that return will be
charged to tax under the derivative contract rules.
The shares as debt rules (sections 91A to 91G of FA 1996) will be

amended so that:
g) no debits of any kind may be brought into account in respect of
shares to which those rules apply;
h) the special tax definition of commercial rate of interest is repealed;
i) the rules can apply where the disguised interest is spread between
two or more companies;
j) falsifying transactions are ignored in a wider range of circumstances
than currently;
k) exit arrangements include any case where it is reasonable to
assume that the investing company will become entitled to receive
amounts equivalent to redemption proceeds.
Leases of plant or machinery
9. Section 785A Income and Corporation Taxes Acts 1988 is intended to

ensure that a person is taxed on the consideration received when the right
to receive rental under a lease of plant or machinery is transferred to
another person. Arrangements have been entered into that attempt to
avoid that section by arranging for the transfer to take place –
• for value that is claimed not to amount to consideration received;
• in such a way that it is not ‘to another person’;
• shortly before the lessor migrates from the UK and before the
consideration is received.
10. Changes will be made to ensure that section 785A applies:

• where the right to rental is transferred for a value that may not
amount to consideration;
• where the transferee is a partnership of which the transferor is a
member or a trust of which it is a beneficiary;
• when the transfer takes place.
11. Draft legislation and explanatory notes are available on HMRC’s website.
Further advice
12. If you have any questions about the changes regarding disguised interest,
please contact Richard Rogers on 020 7147 2625 (email:
richard.rogers@hmrc.gsi.gov.uk) or Richard Thomas on 020 7147 2558
(email: richard.thomas@hmrc.gsi.gov.uk). If your question relates to the
transfer of a right to lease income, please contact Paul Lane on 020 7147
2637 (email: paul.lane@hmrc.gsi.gov.uk). Information about Budget
measures is available on the HM Revenue & Customs website at
www.hmrc.gov.uk

BN22
CONTROLLED FOREIGN COMPANIES: ANTI-AVOIDANCE
1. UK owned groups of companies with subsidiaries and activities outside the

UK, which are participating in any of the avoidance schemes described
below.
2. The purpose of the Controlled Foreign Companies (CFC) legislation is to

counter the artificial diversion of profits from the UK so as to avoid UK tax.
It taxes those profits that arise to low-taxed foreign companies that are
controlled by UK persons and which would have been subject to UK
corporation tax as income had they not been artificially diverted from the
UK. It does not have effect if the controlled foreign company qualifies for
one of five exemptions.
3. Legislation will be introduced in Finance Bill 2008 to block a number of

artificial avoidance schemes that rely on the use of a partnership or a trust
to escape a CFC charge either by misusing one of the exemptions from
the CFC rules or by arranging for profits to be earned in such a way that
they purportedly fall outside the scope of the rules.
4. HM Revenue & Customs (HMRC) does not believe that these schemes
work but these measures will put the question beyond doubt and close off
opportunities for other similar avoidance schemes.
Operative date
5. The changes will have effect on and after 12 March 2008. For changes
that are relevant to an accounting period, the measure will provide that, for
accounting periods that straddle that date, the accounting period will be
split into periods before and from that date with the changes only having
effect to the second part of that accounting period.
6. To be treated as a CFC, a foreign company must be controlled by UK

residents. Section 755D of the Income and Corporation Taxes Act 1988
(ICTA) defines control for the purposes of the CFC rules.
7. In one avoidance scheme, an offshore trust owns more than 50 per cent of
the shares in an overseas company. The users of the scheme claim that
the company is not controlled by UK residents even though the UK
residents who hold the remaining shares retain the right to receive all of
the company’s profits.

8. This measure will amend the definition of control for CFC purposes so that
rights to income and assets will be taken into account in determining
whether UK residents control the foreign company.
9. A foreign company is exempt from the CFC rules if it satisfies one of five
exemptions. One exemption is the exempt activities test. This exemption is
made on the basis that a company that carries on genuine trading
activities from a business establishment in the territory in which it is
resident overseas can reasonably be assumed not to exist to artificially
divert profits from the UK. The test is set out in paragraphs 5 to 12A of
Schedule 25 to ICTA. Paragraphs 6, 12 and 12A provide that for holding
companies to qualify, a minimum of 90 per cent of their gross income must
come, generally by way of dividends, from companies they control that are
carrying out exempt activities.
10. In a further avoidance scheme, the users seek to circumvent the test for
holding companies by arranging for non-dividend income (usually interest)
to accrue in a partnership in which the holding company has a major
interest. They claim that this income does not form part of the gross
income of the company.
11. This measure will put beyond doubt that the gross income of a CFC
includes any income to which it is entitled (including the CFC’s share of
any partnership income) and any trust income in respect of which the CFC
is either settlor or beneficiary.
12. In order to compute the CFC charge, the chargeable profits of the CFC
have first to be calculated and those chargeable profits are then
apportioned to the UK resident companies with an interest in the CFC.
Chargeable profits are computed under section 747(6) of ICTA which
broadly applies the rules of corporation tax to the CFC, except that
chargeable gains are excluded.
13. An avoidance scheme is designed to ensure that income arises under a

trust arrangement in which assets have been settled by the holding
company of a CFC. Users of the scheme claim that, for a number of
reasons, the chargeable profits of CFCs linked to the trust cannot include
income arising in the trust. This measure will ensure that such income will
be included in the chargeable profits of the scheme participants for CFC
purposes.
14. A CFC may pay a dividend to its UK shareholders under an acceptable

distribution policy (ADP) to avoid apportionment of its profits and a charge
to UK tax under the CFC rules. This exemption is made on the basis that
a dividend received by a UK company is taxable in the UK. But scheme
users claim to be able to pay an ADP dividend out of profits other than
those that have been diverted within the avoidance schemes.
15. Whether a CFC has arranged for income to accrue in a partnership or to a

trustee of a trust in relation to which it is a settlor or beneficiary, the
measure will ensure that a dividend can only be paid under an ADP if it is
paid out of the diverted profits within the avoidance schemes.

16. Draft legislation has been published today on the HM Revenue & Customs
website, together with a draft Explanatory Note.
17. HMRC is aware that a number of businesses (especially in the financial

sector) use foreign trusts and special purpose vehicles (SPVs) for wholly
commercial purposes. Although the SPV’s shares are owned by the
foreign trust, in many cases the SPV is nonetheless controlled by UK
residents within the meaning of the CFC rules. But, since they exist for
wholly commercial purposes, such SPVs are exempt from the CFC rules
under the motive test. Where this measure newly brings SPVs that exist
for wholly commercial purposes within the scope of the CFC rules, they
will similarly be exempt from the rules by virtue of the motive test.
18. Any business, whether in the financial sector or otherwise, that would like
the certainty of comfort that the motive test will effect may seek an
advance clearance from HMRC. More information about the clearance
procedure and how to apply may be found in the HMRC International
Manual at: www.hmrc.gov.uk/manuals/intmanual/INTM214120.htm
Further advice
19. If you have any questions about this change, please contact Ian Wright on
020 7147 2701 (email: Ian.Wright1@hmrc.gsi.gov.uk). Information about
www.hmrc.gov.uk

BN23
CORPORATE INTANGIBLE ASSETS REGIME: ANTI-

AVOIDANCE
1. Companies undertaking transactions in respect of intangible assets.
2. Legislation will be introduced in Finance Bill 2008 to clarify that the effect
of the ‘related party’ rules in the corporate intangible assets regime is
unaffected by any administration, liquidation or other insolvency
proceedings or equivalent arrangements that any company or partnership
may be involved in.
Operative date
3. The measure will have effect for transactions made in respect of intangible
assets (including royalties becoming payable) on and after 12 March 2008.
4. Schedule 29 to the Finance Act (FA) 2002 provides, broadly, for a

particular tax treatment to have effect for companies’ intangible fixed
assets created on or after 1 April 2002 when the Schedule came into
force, or (if created prior to 1 April 2002) transferred between ‘unrelated
parties’ on or after that date. Assets created before 1 April 2002 and
transferred between ‘related parties’ on or after this date are subject to
different tax rules. These assets are termed ‘existing assets’.
5. There are four tests in paragraph 95 of Schedule 29 to FA 2002 for

identifying related parties. Legislation will be introduced in Finance Bill
2008 to clarify that the results of these tests are not affected by any
company or partnership being subject to any insolvency arrangements
(e.g. liquidation, administration or other insolvency proceedings) or
equivalent arrangements.
6. This means that, for the purposes of paragraph 95, all the various rules
which are relevant to the tests set out in that paragraph must have effect
disregarding any insolvency proceedings involving a company or
partnership, or equivalent arrangements. Equivalent arrangements include
those where any company or partnership is the subject of a procedure in
another law or territory which is equivalent to insolvency arrangements in
the United Kingdom. Such proceedings or arrangements must be
disregarded whether the company or partnership subject to them is solvent
or insolvent, and whether the company or partnership is one of the related
parties, or another company or partnership whose circumstances could be

relevant to any of the tests in paragraph 95 (such as another member of a
group of companies).
Further advice
7. If you have any questions about this change, please contact Kerry Pope
on 020 7147 2617 (email: kerry.pope@hmrc.gsi.gov.uk) or Grusheka
Lowton 020 7147 2573 (email: grusheka.lowton@hmrc.gsi.gov.uk).

BN24
CAPITAL ALLOWANCES BUYING AND ACCELERATION:

ANTI-AVOIDANCE
1. Companies selling trades where the market value of the plant or

machinery used in the trade is substantially less than its tax written down
value.
2. Legislation will be included in Finance Bill 2008 to prevent avoidance of

corporation tax through schemes that use arrangements intended to
crystallise a balancing allowance on plant or machinery used for the
purposes of the trade to make it available to a profitable group not
intending to carry on the trade for the long term.
3. The measure will have effect, for example, where a loss-making company
is sold to an unconnected profitable group prior to the trade (rather than
the company) being sold to a third party a short time later. The measure
will prevent the sale of the trade leading to a balancing allowance in the
hands of the profitable group.
Operative date
4. The measure will have effect where a company sells its trade, and so
ceases to carry it on, on or after 12 March 2008.
5. As a general rule, where a company ceases to carry on a trade, and where

the market value of the plant or machinery used in the trade is less than its
tax written down value, the company becomes entitled to a balancing
allowance equal to the difference between the market value of the plant or
machinery and its tax written down value. However, section 343 of the
Income and Corporation Taxes Act 1988 (ICTA) provides that this general
rule does not apply where a company (the predecessor) ceases to carry
on a trade and the same trade begins to be carried on by another trader
(the successor) where the two companies are under common control.
6. The avoidance that this measure is designed to counter relies on a trading

company being acquired by a profitable group and, as part of the
arrangements, the trading company selling its trade to an unconnected
buyer a short time later. When the company is acquired by the profitable
group capital allowances are unaffected. However, when the trade is sold,
and if the market value of the plant or machinery is substantially less than
its tax written down value, the existing rules can lead to a substantial

balancing allowance that becomes available to the profitable group. This
can accelerate the rate at which expenditure is written off for tax purposes.
7. The overall effect is that, as well as allowing the capital allowances to be

used by a profitable group that has no long-term interest in the trade, they
are available sooner than they would have been had the trading company
simply been sold by the original owner to the ultimate buyer.
8. The measure will counter this avoidance. It will have effect where a trade
ceases to be carried on by one company and begins to be carried on by
another company where the cessation:
• would generate a balancing allowance; and
• is part of arrangements the main purpose, or one of the main purposes
of which, is to create that balancing allowance.
9. The measure will also have effect where the transfer of part of a trade
would create a balancing allowance.
10. Where the measure has effect the transfer of the trade will be treated as
falling within section 343(2) of ICTA. This will mean, for capital allowances
purposes, treating the trade as if it had been continuously carried on. No
balancing allowance will be generated and the capital allowances will
become available to the person buying the trade for the long term.
11. This measure will not affect the transfer of a trade, even where a balancing
allowance arises, unless it is part of wider arrangements designed to
create a balancing allowance.
Further advice
13. If you have any questions about this change, please contact Paul Lane on
020 7147 2637 (email: paul.lane@hmrc.gsi.gov.uk). Information about
www.hmrc.gov.uk

BN25
EMPLOYMENT-RELATED SECURITIES: DEDUCTIBLE

AMOUNTS
1. Employers who provide, and employees who acquire, employment-related

securities (ERS).
2. Legislation will be included in Finance Bill 2008 to amend the wording of

the rules affecting the taxation of ERS that were rewritten from the Income
and Corporation Taxes Act 1988 (ICTA) into the Income Tax (Earnings
and Pensions) Act 2003 (ITEPA) to put beyond doubt the intention of the
affected parts.
3. Users of avoidance schemes have argued that deductions for ‘amounts

that constitute earnings’ can include earnings which were exempt income
and therefore not charged to income tax, thereby reducing amounts which
count as employment income under Part 7 of ITEPA, reducing chargeable
gains under the Taxation of Chargeable Gains Act 1992 (TCGA), and
increasing corporation tax relief available under Schedule 23 to the
Finance Act (FA 2003). The wording will be amended to ensure that this is
not the case.
Operative date
4. The measure will have effect for all relevant events and transactions
occurring on or after 12 March 2008.
5. The following parts of the legislation contain provisions that refer to

‘amounts that constitute(d) earnings’:
• Part 7 of ITEPA - income tax rules for ERS;
• Section 149AA of TCGA - rules for calculating the gain from ERS that
is chargeable to capital gains tax (CGT);
• Schedule 23 to FA 2003 - rules for corporation tax relief for ERS.
6. In all of the above provisions, the use of the phrase ‘amounts that
constitute(d) earnings’ might be interpreted to cause a lower amount than
intended to be chargeable to income tax, CGT or corporation tax. The use
of this phrase was part of the rewriting of ICTA into ITEPA, which was not
intended to change the meaning of the source legislation in ICTA.

7. The phrase ‘amount that constitute(d) earnings’ will be amended to put
beyond doubt the intention of the legislation. The revision will make clear
that the amounts referred to in this phrase are amounts that have been
subjected to income tax.
8. The measure will have effect for all relevant events and transactions
occurring on or after 12 March 2008. Changes to be made to section
149AA of TCGA applying to restricted and convertible securities; section
428 of ITEPA (as originally enacted), applying to conditional interests in
shares; section 428 of ITEPA, applying to restricted securities; and section
480, applying to employment-related securities options will also have
effect for ERS acquired before 12 March 2008 where the relevant event
and transaction occurs on or after that date.
Further advice
10. If you have any questions about this change, please contact Claire Talbot
on 020 7147 2867 or Jon Clarke on 020 7147 2157 (email:
shareschemes@hmrc.gsi.gov.uk). Information about Budget measures is

BN26
NORTH SEA MANAGEMENT EXPENSES
1. Companies that produce oil and gas in the UK and on the UK Continental
Shelf (UKCS) and have relieved expenses of management against ‘ring
fence’ profits.
2. Legislation will be included in Finance Bill 2008 to close a loophole in the

rules governing the taxation of oil and gas production in the UK / UKCS. It
does so by disallowing expenses of managing an investment business as
a deduction against a company’s ring fence oil and gas profits.
Operative date
3. The measure will have effect on or after 12 March 2008.
4. Current tax law operates a ring fence around the profits of a company’s oil
and gas production in the UK and on the UKCS. The profits are set apart
from any other activities the company undertakes and losses arising
outside the ring fence cannot be used to reduce ring fence profits.
5. In 2004, as part of the Corporation Tax Reform programme, the rules

regarding expenses of managing an investment business were relaxed to
allow such expenses to be relievable against a company’s total profits
from all its activities.
6. Some oil and gas companies have arranged their affairs in order to offset
expenses of managing an investment business against their ring fence
profits. These arrangements seek to undermine the integrity of the ring
fence rules.
7. With effect on and after 12 March 2008, no deduction for expenses of

management of investment business will be allowed against ring fence
profits.

Further advice
9. If you have any questions about this change, please contact Mike Crabtree
on 020 7438 6576 (email: mike.crabtree@hmrc.gsi.gov.uk) or Paul Philip
on 020 7438 6993 (email: paul.philip@hmrc.gsi.gov.uk). Information about
www.hmrc.gov.uk

BN27
UNCLAIMED ASSETS SCHEME: TAX CHANGES
1. Banks and Building Societies, and customers whose accounts are

‘dormant’ (where the customer has not made contact for 15 years, except
in certain circumstances).
2. This measure makes tax changes to facilitate the Unclaimed Assets

Scheme (the “Scheme”), being introduced by the Dormant Bank and
Building Societies Accounts Bill.
3. Legislation will be introduced in Finance Bill 2008 to make some legislative

changes and introduce powers to make secondary legislative changes that
together will ensure that the operation of the Scheme is tax neutral and
does not increase the tax administrative burden for the financial
institutions.
Operative date
4. The power to introduce secondary legislation will have effect on and after
the date that Finance Bill 2008 receives Royal Assent. The capital gains
tax changes in Finance Bill (set out in paragraph 8 below) will have effect
on and after a date to be appointed by Treasury order, which will be the
same date as when the Scheme comes into effect. The tax changes
made by secondary legislation will also have effect on and after the date
that the Scheme comes into effect.
5. Section 851 of the Income Tax Act 2007 requires banks or building
societies to deduct income tax at 20 per cent when a payment of interest
on deposits is made. This measure will introduce a power to make a
secondary legislative change to ensure that the obligation to deduct tax in
respect of interest on dormant account balances within the ambit of the
Scheme only has effect if, and when, a customer reclaims their dormant
account balance.
6. Section 17 of the Taxes Management Act 1970 requires banks and

building societies to make a return to HM Revenue and Customs of all
interest paid or credited on customers’ accounts in each tax year. This
measure will introduce a power to make secondary legislative changes to
ensure that this requirement in respect of interest on dormant account
balances within the ambit of the Scheme only has effect if, and when, a
customer reclaims their dormant account balance and the interest on it.

7. Section 370 of the Income Tax (Trading and Other Income) Act 2005
charges non-corporate recipients to income tax on the full amount of
interest arising in the tax year. This measure will introduce a power to
make secondary legislative changes to ensure that a customer only has an
income tax liability in respect of interest arising on their dormant account
balances within the ambit of the Scheme if, and when, they reclaim their
deposit.
8. Disposals of certain types of bank and building society accounts can give
rise to capital gains liability for the account holder. This measure will
introduce a primary legislative change to the Taxation of Chargeable
Gains Act 1992 to ensure that where dormant accounts within the ambit of
the Scheme are transferred to the body that will administer them under the
Scheme there will not be a disposal for capital gains tax purposes. A
disposal will only occur if, and when, the customer makes a reclaim of
such deposits.
Further advice
9. If you have any questions about this change, please contact Aidan Reilly
on 020 7147 2575 (email: aidan.reilly@hmrc.gsi.gov.uk). Information about
www.hmrc.gov.uk

BN28
INVESTMENT MANAGER EXEMPTION
1. UK-resident investment managers and non-residents trading in the UK

through those investment managers.
2. Legislation will be introduced in Finance Bill 2008 to make changes to the

legislation underpinning the Investment Manager Exemption (IME) to:
• simplify the approach to defining transactions that are within the
scope of the IME; and
• remove one of the conditions that must be met in order for a
transaction to come within the IME.
3. Following these changes, there will be a single list of transactions

qualifying for the IME and the process for updating the list will be simpler.
There will also be a more proportionate outcome where not all of the
transactions carried out in the UK by an investment manager on behalf of
a non-resident meet the qualifying conditions.
Operative date
4. The first change listed in paragraph 2 above will have effect on or after the
date that Finance Bill 2008 receives Royal Assent, but with a saving
provision to ensure that the existing definition of an “investment
transaction” has effect until replaced by an order to be made after that
date. The second change will have effect for the tax year 2008-09 and
subsequent tax years and accounting periods ending on or after the date
that Finance Bill 2008 receives Royal Assent.
5. The IME enables non-residents (companies, individuals and funds) to

appoint UK-based investment managers to carry out transactions on their
behalf without the risk of exposure to UK tax, provided certain conditions
are met.
6. The legislation underpinning the IME is at section 127 of, and Schedule 23
to, the Finance Act (FA) 1995, section 152 of, and Schedule 26 to, FA
2003 and sections 818 to 828 Income Tax Act 2007. This primary
legislation is supplemented by secondary legislation in four sets of
Regulations: Statutory Instruments 2003/2172, 2003/2173, 2007/963 and
2007/964.

Simplifying the approach to defining transactions
7. The IME only has effect for transactions meeting the statutory definition of
an “investment transaction”. The types of transaction coming within that
definition are currently listed in different parts of the primary and
secondary legislation, and there is a statutory power to add to those lists
by making new Regulations.
8. This measure replaces that approach with by allowing HM Revenue &

Customs (HMRC) to make an order designating transactions as
“investment transactions” for the purposes of the IME. After the change,
there will be a single list of transactions coming within that definition and
there will be no need to refer to the current range of different statutory
provisions, which will be repealed.
9. The list of eligible transactions will be available on the HMRC website, so

that all interested parties can see which transactions are covered.
Achieving proportionality
10. At present, where an investment manager carries out, on behalf of a

non-resident, a transaction that does not qualify for the IME, one of the
qualifying conditions can operate in a way that means that no other
transactions carried out by that investment manager for that non-resident
are capable of qualifying for the IME, even where those other transactions
would themselves meet the qualifying conditions. This can result in the
non-resident being exposed to UK tax on all of the transactions carried out
through the investment manager.
11. This measure will remove that condition and produce a more proportionate
outcome. All transactions that meet the qualifying conditions will qualify
for the IME and if there are any non-qualifying transactions it will only be
those transactions that will be exposed to UK tax.
Further advice
12. If you have any questions about this change, please contact Lee Harley on
020 7147 2597 (email: lee.harley@hmrc.gsi.gov.uk), Mike Hogan on
020 7147 2655 (email: mike.hogan@hmrc.gsi.gov.uk), or Andrew Martyn
on 020 7147 3342 (email: andrew.martyn@hmrc.gsi.gov.uk). Information

BN29
TAXATION OF PERSONAL DIVIDENDS
1. Individuals in receipt of dividends from non-UK resident companies.
2. Legislation will be introduced in Finance Bills 2008 and 2009 to make

changes to the system of taxation for individuals who own foreign shares.
3. UK resident individuals and non-resident Commonwealth and EEA

nationals in receipt of dividends from UK resident companies are entitled
under current law to a non-payable dividend tax credit. From 2008, UK
resident individuals and UK and EEA nationals with small shareholdings in
non-UK resident companies will also be entitled to a non-payable tax
credit.
4. From 2009, other such individuals in receipt of dividends from non-UK

resident companies will become entitled to a non-payable tax credit,
subject to certain conditions.
Operative date
5. These changes will have effect on and after 6 April 2008 and 6 April 2009
respectively.
6. Dividends received by individual shareholders are taxed at rates of

10 per cent and 32.5 per cent for basic rate and higher rate taxpayers
respectively.
7. When dividends from UK resident companies are charged to tax,

shareholders are entitled to a non-payable tax credit of one ninth of the
distribution under the provisions of section 397(1) of the Income Tax
(Trading and Other Income) Act 2005. Because tax is charged on the
gross dividend received, including the tax credit, this lowers the effective
rates of tax on these dividends at the personal level to 0 per cent and
25 per cent.
8. The legislation in Finance Bill 2008 will extend the non-payable tax credit
of one ninth of the distribution to UK resident individuals and UK and other
EEA nationals in receipt of dividends from non-UK resident companies, if
they own less than a 10 per cent shareholding in the distributing non-UK
resident company. The other previously announced condition, that in total
the individual must receive less than £5000 of dividends a year from non-
UK resident companies, will not be introduced.

9. The legislation in Finance Bill 2009 will further extend eligibility for the
non-payable tax credit to individuals in receipt of dividends from non-UK
resident companies where the individual owns a 10 per cent or greater
shareholding in the distributing non-UK resident company. The tax credit
will not be available if the source country does not levy a tax on corporate
profits similar to corporation tax. There will be anti-avoidance measures to
ensure that these new rules are not subject to abuse.
Further advice
10. If you have any questions about this change, please contact Andrea
Pierce on 020 7147 2591 (email Andrea.Pierce2@hmrc.gsi.gov.uk).

BN30
FUNDING BONDS
1. Companies and individuals claiming repayments of tax deducted from

interest, which has been paid to them in the form of funding bonds, and
where the tax deducted from the interest was originally paid to
HM Revenue & Customs (HMRC) in the form of funding bonds.
2. Legislation will be introduced in Finance Bill 2008 to provide rules to

confirm that HMRC can satisfy such repayment claims by using all or part
of the funding bonds used to pay the tax deducted.
3. The legislation will allow HMRC to request that the bond issuer divides, if
necessary, any funding bond held by HMRC so that the repayment claim
can be satisfied using part of the funding bond.
Operative date
4. The measure has effect for funding bonds issued on or after

12 March 2008.
5. The current law does not address how a repayment claim in respect of tax
treated as paid to HMRC by a funding bond should be handled and this
has led to uncertainty. In practice, HMRC has satisfied the repayment
claim using a funding bond where this has been feasible.
6. The legislation will introduce a new subsection to section 939 of the

Income Tax Act 2007 (ITA). It will have effect only where the interest on
the loan or debt is paid by funding bonds, and the tax deducted from that
interest is also paid to HMRC using funding bonds. Where a repayment
claim for the tax deducted is subsequently made new subsection 4A
allows the Commissioners for HM Revenue & Customs to give to the
claimant funding bonds in satisfaction of the claim.
7. The legislation will also insert a new section, section 940A into ITA. If the
Commissioners do not hold funding bonds in denominations suitable for
satisfying the repayment claim, this measure will allow the Commissioners
to request that the funding bond issuer divides the funding bonds as
required so that the repayment claim can be satisfied

Further advice
8. A technical note, including the draft legislation, was published on

13 February 2008. Draft guidance on this measure will also be published
on the HM Revenue and Customs website shortly after the publication of
the Finance Bill.
9. If you have any questions about this change, please contact Lesley
Hamilton on 020 7147 2564 (email: lesley.hamilton@hmrc.gsi.gov.uk).

BN31
OFFSHORE FUNDS: NEW TAX REGIME
1. Managers of, and investors in, overseas based funds such as open-ended
investment companies, unit trust schemes and similar arrangements.
2. Legislation will be introduced in Finance Bill 2008 to provide powers to

make regulations dealing with the taxation of investors in offshore funds
and the rules for allowing certain funds to be classed as ‘reporting funds’.
3. The definition of what constitutes an offshore fund will not be changed in

Finance Bill 2008. The Government intends to continue its discussions
with industry on this point and will legislate for a revised definition in
Finance Bill 2009.
Operative date
4. The measure will have effect on a date to be appointed by Treasury order.
5. An ’offshore fund’ is any type of fund that is resident outside the United
Kingdom or established under foreign law and would, if it were established
in the United Kingdom, constitute a collective investment scheme for the
purposes of the Financial Services and Markets Act 2000 (FISMA).
6. Where a fund is certified by HM Revenue & Customs (HMRC) as a

qualifying fund, which is a test that must be satisfied each year, then the
fund is required to distribute at least 85 per cent of its income and any
investor disposing of their interest in the fund is subject to a more
favourable tax treatment than if the fund is non-qualifying. This is because
on disposal of their interest they are liable to capital gains tax (CGT) or
corporation tax on chargeable gains, instead of being chargeable to
income tax or corporation tax on income, as they would be if the fund was
a non-qualifying offshore fund.
7. This measure will mean that, in order to retain CGT treatment for investors
disposing of an interests in the fund, an ‘offshore fund’ will no longer have
to make a distribution but will instead be able to ‘report’ income to
investors who will then be subject to tax on the reported income.

8. Draft regulations will be published shortly after the Finance Bill, which set
out the conditions that an offshore fund must fulfil in order to ensure that a
disposal of an interest in the fund is subject to CGT treatment.
9. It is expected that the conditions for obtaining the new qualifying fund
status will be less onerous, and the test required for this will only be
applied at the outset (instead of, as now, annually). It is also envisaged
that minor failures to keep to the conditions will not result, as they do at
present, in the fund being removed retrospectively from the more
favourable regime.
Further advice
10. If you have any questions about this change, please contact John
Buckeridge on 020 7147 2560 (e-mail: john.buckeridge@hmrc.gsi.gov.uk).

BN32
TIMING OF INCOME TAX PAYMENTS BY UNAUTHORISED

UNIT TRUSTS
1. Trustees of unauthorised unit trusts.
2. Legislation will be included in Finance Bill 2008 to amend unintentional

changes introduced in the Income Tax Act 2007 (ITA), which altered the
time at which tax deducted from distributions made by unauthorised unit
trusts to their unit holders is payable to HM Revenue & Customs (HMRC).
Operative date
3. The changes will have effect on and after the date that Finance Bill 2008
receives Royal Assent.
4. Under section 964(5) of ITA, trustees of unauthorised unit trusts are only
required to pay to HMRC the income tax they deduct from their unit
holders in any year at the end of the following tax year (so for example, for
tax deducted in the tax year 2007-08 need only be paid at the end of
January 2009).
5. This measure will repeal section 964(5). With effect from the tax year
2008-09 and all subsequent tax years, trustees of unauthorised unit trusts
will be required to make payments on account of the tax due to HMRC on
the 31 January and 31 July of one year, with a balancing payment or claim
made on 31 January the following year. (For example, for the tax year
2008-09 payments on account will be due on 31 January 2009 and
31 July 2009, with a balancing payment on 31 January 2010). This will
reinstate the position that existed prior to the unintentional changes
introduced by ITA.
Further advice
6. If you have any questions about this change, please contact Liz Foster on
0114 2969 377 (email: liz.foster@hmrc.gsi.gov.uk) or Sandra Whyman on
0114 2969 688 (email: sandra.whyman@hmrc.gsi.gov.uk). Information

BN33
FUNDS OF ALTERNATIVE INVESTMENT FUNDS
1. Authorised investment funds (AIFs) that take advantage of proposed new

Financial Services Authority rules for Funds of Alternative Investment
Funds (FAIFs) to invest mainly in non-qualifying offshore funds,
particularly those with exempt or corporate investors; and investors in
those funds which enter the “Tax FAIFs” regime.
2. Regulations will be laid to provide an additional tax regime for AIFs which
invest into non-distributing offshore funds. The regulations have been
drafted to remove tax as a barrier to the introduction of the new Financial
Services Authority (‘FSA’) regulatory regime titled ‘Funds of Alternative
Investment Funds’. The changes will enable certain funds to elect for a tax
treatment as “Tax FAIFs”, which will move taxation on offshore income
gains from the fund to its investors.
Operative date
3. The changes will have effect on and after a date to be set by Treasury
order, the date to be determined by the date the FSA regulatory changes
become effective.
4. Under the current regulations:

• a gain made by an authorised investment fund on disposal of an interest
in a non-qualifying offshore fund is an offshore income gain and will be
subject to corporation tax in the fund; and
• when an investor realises a gain by disposing of units in the fund then
they may also be taxable on a capital gain.
5. Under the proposed new regulations:

• in the case of an authorised investment fund electing for the new tax
treatment, the fund will be exempt from tax on offshore income gains;
and
• an investor in a FAIF that had so elected would then be chargeable
solely to income tax on any gain made on disposal of units in the fund.
6. A Tax Framework document was published on the HM Treasury website

on 22 February 2008 and draft regulations have been published today on
the HM Revenue & Customs website.

Further advice

BN34
PROPERTY AUTHORISED INVESTMENT FUNDS
1. Authorised investment funds (AIFs) that invest mainly in property, UK-Real

Estate Investment Trusts (UK-REITs) or similar foreign companies.
2. Investors in AIFs that enter the Property AIF tax regime.
3. New regulations for AIFs will be introduced, providing a tax regime for
investment into real property and certain property companies, which will
enable certain AIFs to elect for a tax treatment that will move the point of
taxation from the fund to its investors.
4. The new regulations will enable a Property AIF to provide an open-ended

fund alternative to the existing closed-ended UK-REITs.
Operative date
5. The regulations will have effect on and after 6 April 2008.
6. Under the current regulations:

• an AIF pays corporation tax (CT) on rental profit or other property
income such as property income distributions from UK-REITs or their
foreign equivalents;
• any other taxable income received by an AIF investing in property is
treated in a similar way to property income;
• the income is distributed by the AIF, along with any other income the
AIF may accrue, as a dividend carrying a tax credit;
• exempt recipients (such as pension funds and charities) cannot reclaim
the tax credit; and
• dividends received from UK companies are not taxable in the AIF.
7. Under the new regulations, laid before Parliament on 12 March 2008:

• an AIF that invests mainly in property and certain related securities will
be able to elect for the Property AIF regime to have effect;
• in a Property AIF rental profit and certain other property related income
will be exempt from taxation in the fund. It will normally be distributed to
investors under deduction of tax. Basic rate taxpayers will have no
further tax liability, non-taxpayers and exempt bodies will be able to
reclaim this tax, while higher rate taxpayers and some corporates will
have a further tax liability to pay;

• other taxable income of the Property AIF will also be distributed to
investors under deduction of tax. Investors will similarly be able to
either reclaim the tax or incur a further charge as appropriate; and
• UK dividends which are currently not taxable in the fund will remain
exempt, as they are for all corporate recipients and will fund dividend
payments carrying a tax credit to investors as at present.
8. To qualify for the new regime Property AIFs will have to meet certain
conditions, including:
• incorporation as an open-ended investment company (subject to
Financial Services Authority regulation);
• carry on a property investment business (amounting to at least
60 per cent of the business);
• a ‘genuine diversity of ownership’ condition, so that the fund is not
limited to or targeted at only a few specified investors; and
• limits on the holdings of corporate investors and on the type and
amount of loan financing in the fund.
9. The regulations and explanatory memorandum have been published today

on the HM Revenue & Customs website.
Further advice

BN35
REPEAL OF OBSOLETE ANTI-AVOIDANCE PROVISIONS
1. Financial concerns, particularly insurance companies (non-life) and

exempt bodies such as charities and pension schemes; and employees
who acquired and employers who awarded Employment-Related
Securities before October 1987.
2. Legislation will be introduced in Finance Bill 2008 to repeal anti-avoidance

legislation relating to shares and securities which is no longer of any
practical use.
Operative date
3. This measure will have effect for individuals and exempt bodies on and
after 6 April 2008, and for companies for accounting periods beginning on
or after 1 April 2008.
Dividend buying
4. Legislation to prevent “dividend buying” by, in particular share dealers and

exempt bodies, is in sections 731 to 735 of the Income and Corporation
Taxes Act 1988 (ICTA). It was introduced in 1955. At that time if a
company whose business included buying and selling shares bought a
share shortly before the declaration of a dividend, received the dividend
and then sold the share, it would suffer a loss as a result of the reduction
in value of the share caused by the payment of the dividend. At that time
the dividend itself would not be taxable and so the share-dealer could set
the loss on disposal of the shares against the dividend and reclaim income
tax treated as suffered (up to 5 April 1966), actually suffered (6 April 1966
to 5 April 1973) or paid as a tax credit (from 6 April 1973 to 2 July 1997).
5. Similarly, exempt funds such as charities and pension schemes could

“buy” dividends and claim the tax back.
6. There have been a number of developments in tax law since 1955 which
have meant that share-dealers are no longer exempt from tax on dividends
and exempt bodies cannot reclaim any tax or tax credits in relation to
dividends.

7. The position now is that exempt bodies with large portfolios of shares and
perhaps more than one fund management company involved have to
spend a lot of time and money to determine whether the terms of sections
731 to 735 ICTA are met and, if they are, to work out the tax that may be
due. But it has been found that even the largest exempt funds have little
or no liability under the rules but a high compliance burden. As far as
share dealers are concerned the only type of company currently affected
by the legislation is insurance companies but only in relation to their non-
life business.
8. The same considerations also apply to another piece of legislation, section

736 of ICTA, which deals with “dividend buying” where a share-dealer has
more than 10 per cent of the shares in a company. Again changes in
legislation mean that this provision can in practical terms have effect now
only to an insurance company with non-life business, and it is extremely
uncommon for such a company to hold more than 10 per cent of another
company as part of its “trading stock”.
9. Accordingly, sections 731 to 736 and associated provisions will be

repealed in their entirety. For insurance companies with non-life business
a new provision, section 95ZA of ICTA, will be introduced, which will only
have effect where the distribution concerned exceeds £50,000.
Transactions in securities
10. In 1960, an anti-avoidance rule was introduced in relation to transactions

in securities, provisions which now appear for companies as sections 703
to 709 ICTA and for individuals as Chapter 1 Part 13 of Income Tax Act
2007 (ITA).
11. One of the specified circumstances in which the legislation applies,

Circumstance B, has effect for dealers in securities and shares, but for the
same reasons that sections 731 to 735 ICTA are no longer effective,
section 704 paragraph B and Circumstance B in section 687 ITA are no
longer of any effect.
12. This Circumstance together with associated provisions will be repealed.
Employment securities
13. In 1972 the first legislation relating to employment related shares was
introduced. This legislation was replaced from October 1987 by legislation
in Finance Act 1988, but became sections 138 and 139 of ICTA in relation
to shares, etc., acquired before October 1987.

14. Sections 138 and 139 were repealed generally by Schedule 7 to the
Income Tax (Earnings and Pensions) Act 2003 but were retained for
shares acquired between 1972 and 1987. It is now believed that there are
no remaining shares to which sections 138 and 139 have effect in issue
and accordingly those sections will be finally repealed in their entirety
together with associated provisions.
Further advice
15. If you have any questions about this change please contact Richard
Thomas on 020 7147 2558 (email: richard.thomas@hmrc.gsi.gov.uk) in
relation to all the above measures apart from employment securities. If
you have questions about the employment securities change,
please contact Claire Talbot on 020 7147 2867 (email:
claire.talbot@hmrc.gsi.gov.uk). Information about Budget measures is

BN36
LIFE INSURANCE COMPANIES: CONSULTATION OUTCOMES

AND SIMPLIFICATION
1. Companies and friendly societies carrying on life insurance business and

societies carrying on non-life business.
2. Legislation will be introduced in Finance Bill 2008 to:

• simplify the tax law relating to financing arrangements (contingent
loans and financial reinsurance) used by life insurance companies;
• align the tax treatment of transfers of tax exempt “other” business,
between friendly societies with transfers of such business between a
friendly society and a life insurance company;
• change the definition of foreign currency assets introduced by Finance
Act (FA) 2007, remove a requirement to certify the amount of these
assets and allow companies to use the revised version for 2007;
• remove the power to modify the computation of chargeable gains in
respect of structural assets held by life insurance companies; and
• repeal spent provisions and clarify the effect of provisions.
3. These changes are further products of the consultation on how to simplify

certain aspects of the tax law relating to life insurance companies
launched by HM Revenue & Customs (HMRC) in May 2006.
Operative date
4. The new financing rules will have effect for periods of account beginning
on or after 1 January 2008.
5. The rules for transfers of tax exempt other business between different
types of friendly society will have effect for transfers taking place on or
after the date that Finance Bill 2008 receives Royal Assent.
6. The changes to the foreign asset rules will have effect for periods of
account beginning on or after 1 January 2008 and ending on or after
12 March 2008, subject to the ability to elect for these rules to have effect
for 2007.
7. The power to modify the computation of chargeable gains in respect of

structural assets will be repealed from the date that Finance Bill 2008

8. Life insurance companies have requirements for capital which cannot

normally be met by straightforward borrowing. Instead they have used a
variety of more complex financing arrangements including contingent
loans and financial reinsurance contracts to meet these requirements. In
many cases the arrangements do not give rise to any tax issues.
However, HMRC has seen examples of financing arrangements which
have been used to generate profits without tax being paid on them, instead
of contributing to working capital. Legislation introduced in FA 2003
sought to give an appropriate tax treatment for contingent loans, but the
legislation, in section 83ZA of FA 1989, is complex and mechanical in
seeking to distinguish cases where there is tax avoidance from those
where there is not, and until amendments made by FA 2007, was also
seriously flawed.
9. Revised legislation will be introduced in Finance Bill 2008 to deal with

financing arrangements. The revised legislation will impose a tax charge
only when the financing arrangements are used to generate surplus which
is transferred to shareholders and which would not have existed without
the arrangements. It will not affect financing designed simply to provide
working capital or improve solvency. The legislation will also give relief for
repayments of loans or recapture of reinsured liabilities to the extent that
surplus has been taxed.
10. Friendly societies are entitled to a tax exemption in respect of long-term

health and other sickness business, commonly known as “other” business,
which is not available to other companies writing insurance business. A
more generous exemption is available to “old” societies, ones registered
before 1 June 1973, compared to the exemption available to “new”
societies. As the tax exemption depends on the nature of the society, a
transfer of previously tax exempt other business from an old society to a
new society would result in the loss of tax exemption. However, as a
result of changes made in FA 2007, an old society can transfer its tax
exempt other business to a life insurance company which remains entitled
to the tax exemption for business in force at the time of the transfer.
Therefore the law will be changed to allow the transfer of tax exempt other
business between old and new friendly societies on the same basis as
those between a friendly society and an insurance company. Accordingly
the tax exemption will only be retained by the society in relation to
business in force at the time of transfer. Any attempt by the transferee to
write new tax exempt business or to increase the scale of existing tax
exempt business will result in the loss of the exemption.
11. The term “foreign currency assets” (FCAs) was introduced by FA 2007 to
describe assets backing overseas business, the income and gains from
which are directly referable to gross roll-up business. To qualify as FCAs,
there is a requirement that relevant assets must be certified as FCAs
within 3 months of the company’s year end. Operational experience in
dealing with FCAs has brought to light some difficulties arising from
applying the rules in practice. Legislation will be introduced in Finance Bill
2008 to amend the definition of FCAs (which will become “foreign business

assets”) and to improve the operation of the rules by removing the
certification requirement. In addition the 3 month time limit having effect
for 2007 will be changed to 12 months, and all companies will be allowed,
but not required, to use the new rules for their 2007 tax return.
11. FA 2007 introduced a definition of “structural assets”, which are assets

that are treated as part of the capital structure of a life insurance
company’s business, rather than assets on a disposal of which a trading
profit should arise. Accordingly gains on disposal of structural assets are
only treated as chargeable gains. FA 2007 also included a power to
modify the computation of chargeable gains from the disposal of structural
assets, particularly where the assets were held in 1989 when there were
major changes in the law. It has now been agreed that this power is
unnecessary and will be repealed. Discussions continue about a possible
extension (using another power) of the list of assets that will count as
“structural assets”.
Further advice
12. If you have any questions about these changes, please contact Richard
Thomas on 020 7147 2558 (email: richard.thomas@hmrc.gsi.gov.uk) or
Colin McHardy on 020 7147 2614 (email colin.mchardy@hmrc.gsi.gov.uk).

BN37
LIFE INSURANCE COMPANIES: INTEREST APPORTIONMENT
1. Companies carrying on life insurance business.
2. The measure will ensure that interest paid by insurance companies on

amounts deposited back with them by re-insurers will be apportioned
appropriately between different categories of business for corporation tax
purposes.
Operative date
3. The measure will have effect for periods beginning on or after

1 January 2008 and ending on or after 12 March 2008.
4. It is common practice for life insurance companies to reinsure large blocks

of pension annuities in payment to specialist providers who are better able
to manage the longevity risk attached to such business. Because pension
annuities are long-term contracts, such reinsurance arrangements can
result in a substantial credit risk for the insurer. To manage that credit risk,
it is normal practice for the re-insurer to deposit back all or a substantial
portion of the premium paid with the original insurer. It is also normal
practice for the original insurer to pay interest to the re-insurer on that
deposit back. As the deposit back liability replaces the reinsured liability in
the insurer’s apportionment computations, any income arising from the
deposit-back will be allocated to a company’s gross roll-up business
(GRB), the category which includes pension business.
5. Even though the deposit back is entirely related to GRB, interest paid on
the deposit back is apportioned between GRB and basic life assurance
and general annuity business (BLAGAB). This means that a significant
proportion of the deposit back interest may be relieved against BLAGAB
income and gains. For a variety of reasons this may result in an
unintended tax advantage for companies.
6. Finance Bill 2008 will introduce legislation to provide that interest paid on
deposits back from re-insurers will be wholly allocated to the category or
categories of business reinsured by the contract giving rise to the deposit
back.

Further advice
7. If you have any questions about this change, please contact Richard
Thomas on 020 7147 2558 (email: richard.thomas@hmrc.gsi.gov.uk) or
Colin McHardy on 020 7147 2614 (email colin.mchardy@hmrc.gsi.gov.uk).

BN38
INSURANCE PREMIUM TAX (IPT): CHANGES RELATING TO

OVERSEAS INSURERS
1. Overseas insurers with no business establishment in the UK who write

taxable risks located in the UK, and their UK customers.
2. This measure will remove the compulsory requirement for overseas

insurers to appoint a tax representative and additionally, will restrict the
ability of HM Revenue & Customs (HMRC) to assess the insured party for
tax due from an overseas insurer to circumstances where the insurer is
located outside of the EU and not covered by the Mutual Assistance
Directives or any such similar arrangements on exchange of information
and recovery of tax due.
3. Overseas insurers writing taxable risks located in the UK will still need to
register for insurance premium tax (IPT), but will be able to choose
whether or not to appoint an agent to act for them in the UK. This agent
will not be jointly and severally liable for the tax due by the insurer.
Operative date
4. The changes will have effect on and after the date that Finance Bill 2008
5. Sections 57 and 58 of the Finance Act (FA) 1994 requires an overseas

insurer who is liable to be registered for IPT, but who has no business or
other fixed establishment in the UK, to appoint a tax representative. That
tax representative is jointly and severally liable for the discharge of the
insurer’s obligations and liabilities in the event of failure to comply by the
insurer. Also, section 65 sets out that where an overseas insurer does not
have any business or other fixed establishment in the UK, and does not
have a tax representative, then the insured party may be assessed for the
tax due from the insurer.
6. Legislation will be included in Finance Bill 2008 to delete sections 57 and

58 of FA 1994. It will no longer be compulsory for an overseas insurer to
appoint a tax representative. Any representative will no longer have the
requirement to be jointly and severally liable. The legislation will also
amend section 65 of FA 1994 so that the insured party cannot be
assessed for tax due from their insurer unless the insurer is located in a

country outside the EU and not covered by mutual assistance, or similar,
provisions.
7. A consultation document published in July 2007, summary of responses to

the consultation, and the Impact Assessment are available on the HMRC
website. Public Notice IPT1 will be updated to reflect the changes to the
tax representative requirements and the changes to the liability of the
insured. The guidance in V2-01 will also be updated to reflect the
changes.
Further advice
8. If you have any questions about this change, please contact the National
Advice Service on 0845 010 9000. Information about Budget measures is

BN39
STAMP DUTY: ALTERNATIVE FINANCE: SUKUK
1. Individuals and companies wishing to invest in alternative finance

investment bonds which are similar to debt securities (“sukuk”).
2. Legislation will be introduced in Finance Bill 2008 to classify alternative

finance investment bonds as loan capital for stamp duty purposes. These
products replicate the economic effect of debt securities which carry a right
to interest and the measure will ensure that they are treated on a par with
equivalent debt securities falling within the definition of loan capital.
Operative date
3. These changes will have effect for transfers of loan capital on or after the
date that Finance Bill 2008 receives Royal Assent.
4. Finance Act 2005 classified alternative finance investment bonds as debt

securities for the purpose of tax, excluding stamp duty. These changes
bring the treatment of alternative finance investment bonds in line with
other taxes by classifying them as debt securities.
5. The proposed changes classify alternative finance investment bonds as

loan capital and the return as a right to interest so that the bonds may
benefit from the loan capital exemption.
Further advice
6. If you have any questions about this change, please contact Nicky Rass
on 020 7147 2802 (email: Nicola.Rass@hmrc.gsi.gov.uk). Information

BN40
ALTERNATIVE FINANCE ARRANGEMENTS
1. Individuals and companies who are party to alternative finance

arrangements.
2. Legislation will be introduced in Finance Bill 2008 to amend the power to

make provision relating to alternative finance arrangements by secondary
legislation.
Operative date
3. The amended power will have effect on and after the date that Finance Bill
2008 receives Royal Assent.
4. Section 98 of Finance Act (FA) 2006 permits amendments to the tax rules
on alternative finance arrangements in Chapter 5 of Part 2 to FA 2005 to
be made by order. This power allows for the introduction of provisions
relating to new arrangements, but does not allow for amendments to the
rules on existing arrangements. This measure will introduce a further
power to permit amendments to existing tax rules on alternative finance
arrangements to be made by secondary legislation.
Further advice
5. If you have any questions about this change, please contact Tony Sadler
on 020 7147 2608 (e-mail: tony.sadler@hmrc.gsi.gov.uk) or Sue Davies
on 020 7147 2565 (e-mail: sue.davies@hmrc.gsi.gov.uk). Information

BN41
OVERSEAS PENSION SCHEMES
1. Internationally mobile workers in the UK who are members of a non-UK

pension scheme, their employers and the managers of those non-UK
schemes.
2. The measure will ensure those funds in non-UK pension schemes that
have received UK tax relief are appropriately identified for the purposes of
UK tax limits and charges on benefits equivalent to those for registered UK
pension schemes having effect.
Operative date
3. For non-UK money purchase pension schemes, the measure will have
effect for employer contributions paid on or after 12 March 2008.
4. For non-UK defined benefit (i.e. final salary) pension schemes the
measure will have effect on and after 6 April 2008.
5. Migrant workers in the UK and their employers can obtain tax relief on
contributions to non-registered pension schemes based outside the UK. In
order to apply appropriate UK tax controls on reliefs equivalent to those for
registered pension schemes, it is necessary to work out how much UK tax
relief has been received on the individual’s pension fund.
6. Under the law, the larger the employer contribution the lower the
proportion of an individual’s pension fund is treated as having received UK
tax relief.
7. This measure will ensure that the amount of the employer’s contribution
will not affect the calculation of the proportion of the fund that is subject to
UK tax rules.
Further advice
8. If you have any questions about this change, please contact Pensions
Helpline on 0845 600 2622. Information about Budget measures is

BN42
PENSIONS: REGULATION MAKING POWERS
1. Pension scheme administrators, members of registered pension schemes

and their dependants.
2. Legislation will be introduced in Finance Bill 2008 to provide for existing

regulation making powers to be amended to:
• allow certain payments from pensions schemes to be taxed in the
same way as other authorised payments made by pension schemes
instead of as unauthorised payments; and
• simplify the administration of certain trivial commutation payments.
3. The provisions will enable regulations to define payments to be treated as

authorised.
Operative date
4. This measure will have effect on and after the date that Finance Bill 2008
receives Royal Assent. However the regulations made under this power
may have retrospective effect where this will not disadvantage anyone
affected.
5. The simplified tax regime for registered pension schemes was introduced
in Finance Act 2004 and has effect on and after 6 April 2006. The Act lists
what payments a registered pension scheme is authorised to make to a
member of a scheme. All other payments to a member are unauthorised
and taxable at a rate of up to 70 per cent of the payment.
6. Regulations can be made to deem certain payments to be authorised but

not to provide for their taxation treatment. This means some payments
covered will not be chargeable to income tax at all.
7. Finance Bill 2008 will provide for changes to the existing power to enable
these payments to be taxed in the same way as other authorised
payments made by a registered pension scheme. Provision will also
enable retrospective treatment where this will not disadvantage anyone
affected.

8. Additionally, some easements will be made to the rules for ‘trivial
commutation’ – the circumstances in which pension rights giving rise to
very small pension entitlements can be commuted into a lump sum up to
25 per cent of which would be tax free. Regulations under the widened
power set out above will provide that it will be possible to commute some
small ‘stranded pots’ as well as pension savings below £2,000 in
occupational pension schemes. These will have effect in addition to the
current rule that restricts the aggregate of an individual’s pension savings
to £16,000 for trivial commutation.
Further advice
9. If you have any questions about these changes, please contact Pensions
available on the HM Revenue & Customs website at HM Revenue &

BN43
PENSIONS: TECHNICAL IMPROVEMENTS
1. Pension scheme providers, pension scheme administrators, members of

registered pension schemes and their dependants, and financial advisers.
2. Draft legislation was published alongside the 2007 Pre-Budget Report

(PBR), together with PBR Note 14, setting out changes to simplify the way
the pension tax rules operate when testing pension increases against the
lifetime allowance.
3. Legislation will be included in Finance Bill 2008 to provide:

• an exemption from the lifetime allowance test for small annual
increases in pensions, and rounding; and
• greater flexibility in the choice of the Retail Price Index (RPI)
reference month including pension increases awarded within the
first year of the pension commencing.
Operative date
4. The amendments for small annual increases in pensions and rounding will
be backdated to have effect on and after 6 April 2006 (A Day). The change
to the RPI reference month will have effect on and after 6 April 2008.
5. The tax rules for pension savings are set out in Part 4 of Finance Act
2004.
6. Three small changes will be made to the draft legislation published at 2007
PBR following representations. These will provide further easements to the
rules for how the lifetime allowance test benefit crystallisation event 3
(BCE3) operates for pension increases, whilst maintaining the integrity of
the test:
• A change to allow pension increases of £250 per annum or less to be
exempt from the BCE3 test;
• A provision for rounding so that once the pension increase has been
awarded (irrespective of the size of increase or whether it is paid
monthly or weekly) it can be increased to the nearest whole number
without the need for a further test; and
• A change to the RPI reference month to allow schemes to use the
figure for RPI for any month which is within 12 months before the
increase in pension.

Further advice
7. If you have any questions about this change, please contact Pensions

BN44
APPROVED OCCUPATIONAL PENSION SCHEMES
1. Employers who contribute to occupational pension schemes.
2. Legislation will be introduced in Finance Bill 2008 to confirm that in

calculating its corporation tax liability the amount a company was
permitted to deduct in respect of pension costs between 1 April 2004 and
5 April 2006 was limited to the pension contributions paid in the year.
Operative date
3. This measure is wholly retrospective and has effect for employer

contributions to registered pension schemes relating to accounting periods
starting on or after 1 April 2004 and ending on or before 5 April 2006.
4. Tax relief for employer contributions to pension schemes is given on cash

contributions and not on amounts shown by company accounts. This
policy was maintained when the taxation of pension schemes was
modernised from 6 April 2006 (A Day).
5. Following changes in the legislation on and after 1 April 2004 which had
effect on and before 5 April 2006, the express provision preventing a tax
deduction for expenses shown in the profit and loss account was removed.
This deletion did not reflect a change of Government policy and had no
practical impact, as the overall effect and application of the legislation was
still to allow only cash contributions.
6. For the prevention of doubt, legislation will be included in Finance Bill 2008
which will confirm that during the period between 1 April 2004 and
5 April 2006, tax relief for employer contributions to registered pension
schemes is restricted to the cash paid in the relevant accounting year.
Further advice
7. If you have any questions about this change, please contact Martyn
Rounding on 020 7147 2821 (email: martyn.rounding@hmrc.gsi.gov.uk).

BN45
PENSION SAVINGS AND INHERITANCE TAX
1. Pension scheme providers, pension scheme administrators, members of

pension schemes, insurance companies and financial advisers.
2. Legislation will be introduced in Finance Bill 2008 to:

• ensure that tax-relieved pension savings diverted into inheritance using
scheme pensions and lifetime annuities are subject to unauthorised
payment tax charges and, where appropriate, inheritance tax (IHT);
and
• restore IHT protection to savings in overseas pension schemes.
3. This measure was announced at the 2007 Pre-Budget Report (PBR). Draft
legislation for the measure was published at that time, to which there have
been minor amendments.
Operative date
4. Operative dates are outlined for the various measures in the paragraphs
below.
Inheriting tax-relieved pension savings
5. Finance Bill 2008 will include provisions to implement the proposals on

scheme pensions and annuities. Details of this are set out in PBR Note 15
and the subsequent changes are set out below.
6. The rules preventing unused tax-relieved funds being passed as increased

pensions after death to other family members, other than dependants, do
not currently have effect for schemes where there are 20 or more
members and all members have their rights increased at the same rate. A
change to the draft legislation published at PBR will ensure that the
unauthorised payment charges and IHT will not have effect so long as
there are at least 20 scheme members, who have their rights increased at
the same rate because another member has died. This will have effect in
relation to a member who dies on or after 6 April 2008.

7. Finance Bill 2008 will also provide that an IHT charge will arise as a result
of an unauthorised lump sum payment in respect of a pension scheme
member who dies aged 75 or older and who was in receipt of an annuity or
scheme pension. Any IHT nil-rate band that has not already been set
against the estate of the deceased may be set against this IHT charge. A
change will be made to the draft legislation published at PBR to provide for
the situation where the estate has not used all of the nil-rate band and
more than one of the IHT charges in respect of a scheme pension or an
annuity arises. This will ensure that the remaining nil-rate band can be
used only once against the IHT charges. The measure, including this
change, will have effect when the member dies on or after 6 April 2008.
8. Sections 151A to 151C of the Inheritance Tax Act 1984 (IHTA) give effect
to similar provisions on ‘alternatively secured pension’ (ASP) funds to
those set out in paragraph 7 above. Again, any nil-rate band that has not
been set against the estate may be set against the IHT charges on ASP
funds. To bring these provisions into line with those for scheme pensions
and annuities, Finance Bill 2008 will ensure that any remaining nil-rate
band may be used only once against the IHT charges arising on ASP
funds. This change will have effect when a member dies on or after
6 April 2008.
Inheritance tax on overseas pension schemes
9. PBR Note 14 sets out details of changes that will be made to restore IHT
protection to UK tax-relieved pension savings in overseas pension
schemes. The provisions in Finance Bill 2008 will give IHT protection to
pension savings which have had UK tax relief and also to all savings in
certain overseas pension schemes. The IHT protection will apply to funds
in overseas pension schemes that are tax-recognised and regulated in the
country in which they are established. Or, if there is no system for tax
recognition or regulation in that country, then the funds must be used to
provide a pension income for life.
10. The change to the IHT rules for overseas pension schemes will have effect
on or after 6 April 2006.
Further advice
11. If you have any questions about the IHT changes in paragraphs 6 to 10
above, please contact the Inheritance Tax & Probate Helpline on
0845 3020900. If you have any questions about the other pensions
change in paragraph 6 above, please contact the Pensions Helpline on
0845 600 2622. Information about Budget measures is available on the
HM Revenue & Customs website at www.hmrc.gov.uk

BN46
INHERITANCE TAX: TRANSITIONAL SERIAL INTERESTS
1. Trustees and beneficiaries of “interest in possession” (IIP) settlements set

up on or before 21 March 2006.
2. Legislation will be introduced in Finance Bill 2008 to clarify the inheritance

tax (IHT) rules where trusts in place on or before 21 March 2006 on IIP
terms come to an end on or after 22 March 2006 and are replaced with
new IIP trusts for the same beneficiary. In addition, the transitional period
will be extended by six months to 5 October 2008.
Operative date
3. The measure has effect on and after 22 March 2006.
4. Schedule 20 to the Finance Act 2006 changed the IHT rules for IIP trusts.
It included a transitional period from 22 March 2006 to 5 April 2008 to
enable trustees to reorganise trusts set up on or before 21 March 2006
without being subject to the new rules.
5. The effect of those transitional provisions is unclear where pre-

22 March 2006 IIP trusts are replaced with a “transitional serial interest” as
defined in sections 49C, D and E of the IHT Act 1984 for the same
beneficiary. This measure will ensure that the new rules will not have
effect where this kind of change is made in the transitional period.
6. The legislation will also ensure that the new rules will have effect as
intended where an IIP trust is replaced after the transitional period with a
new IIP trust for either the same or a different beneficiary.
7. In addition, this measure extends the transitional period so that it will now
end on 5 October 2008.

Further advice
9. If you have any questions about this change, please contact the
Probate/IHT Helpline on 0845 3020 900. Information about Budget
www.hmrc.gov.uk

BN47
INHERITANCE TAX (IHT) NIL-RATE BAND
1. Individuals, executors and personal representatives of estates of people

who have died.
2. The 2007 Pre-Budget Report (PBR) announced that legislation would be

introduced in Finance Bill 2008 to allow any IHT nil-rate band unused on a
person’s death to be transferred to the estate of their spouse or civil
partner who dies on or after 9 October 2007. More details can be found in
PBR Note 16.
3. This Note sets out details of a consequential amendment to capital gains

tax (CGT) provisions to prevent the revision of the valuation of the base
cost of an asset for CGT purposes where the valuation of that asset is
subsequently ascertained for IHT purposes.
Operative date
4. The change to the CGT provision will have effect on and after 6 April 2008.
5. Section 274 of the Taxation of Capital Gains Act 1992 (TCGA) provides
that where the value of an asset in a deceased person’s estate has been
ascertained for IHT purposes, that value also has effect for CGT purposes.
The value of an asset transferred from a deceased’s estate will not be
determined for CGT purposes until a subsequent disposal of that asset. So
generally, where the value of an asset needs to be ascertained for IHT
purposes, this will occur on the death of the individual and so before the
value of that asset is ascertained for CGT purposes.
6. In some cases the changes announced at 2007 PBR will mean that, to
calculate how much nil-rate band can be transferred from the first
deceased spouse’s estate, the value of assets in that estate will need to
be determined when the second spouse dies. In these circumstances, if
the value of the asset differs from any already agreed for CGT purposes,
section 274 of TCGA would require CGT to be recalculated on the basis of
the value agreed for IHT purposes.

7. This measure will ensure that the requirement under section 274 of TCGA
to use the IHT valuation for CGT purposes will not have effect where the
valuation of an asset does not have to be ascertained for IHT purposes on
the death of an individual. So, for example, if the IHT valuation of an asset
does not have to be ascertained until the death of the surviving spouse in
order to establish the nil-rate band that may be transferred, then section
274 of TCGA will not require that value to be used for any CGT
calculation.
Further advice
8. If you have any questions about this change, please contact the Inheritance
Tax & Probate Helpline on 0845 3020900. Information about Budget
www.hmrc.gov.uk

BN48
CAPITAL GAINS TAX: RELIEF ON DISPOSAL OF A

BUSINESS (ENTREPRENEURS’ RELIEF)
1. Individuals and trustees who dispose of the whole or part of a trading

business, or of shares in a trading company in which they have a
qualifying interest.
2. Legislation will be introduced in Finance Bill 2008 to establish a new

entrepreneurs' relief, which will complement the capital gains tax (CGT)
reform package announced at the 2007 Pre-Budget Report (PBR).
Entrepreneurs’ relief may be available in respect of gains made by
individuals on the disposal of:
• all or part of a trading business the individual carries on alone or in
partnership;
• assets of the individual’s or partnership’s trading business following
the cessation of the business;
• shares in (and securities of) the individual’s “personal” trading
company (or holding company of a trading group);
• assets owned by the individual and used by his / her “personal” trading
company (or group) or trading partnership.
3. The first £1 million of gains that qualify for relief will be charged to CGT at
an effective rate of 10 per cent. Gains in excess of £1 million will be
charged to CGT at the rate of 18 per cent.
4. An individual will be able to make claims for relief on qualifying disposals

made on or after 6 April 2008. Claims may be made on more than one
occasion up to a ‘lifetime’ limit of £1 million. Disposals on or before
5 April 2008 do not affect the lifetime limit. The £1 million limit will only
begin to diminish when the relief is claimed.
5. Trustees will be able to claim relief on certain disposals of business

assets and company shares and securities where a “qualifying
beneficiary” has a qualifying interest in the business in question. Trustees
must make claims jointly with the “qualifying beneficiary”. Any relief given
on the trustees’ gains will reduce a beneficiary’s £1 million lifetime limit on
relief.

Operative date
6. This measure will have effect for qualifying disposals made on or after
6 April 2008. Transitional provisions will also allow relief to be claimed in
certain circumstances where gains that have been deferred from
disposals made on or before 5 April 2008 become chargeable after that
date.
7. Section 4 of the Taxation of Chargeable Gains Act 1992 (TCGA) provides

that an individual is chargeable to CGT at the rates for income tax on
savings income (10 per cent, 20 per cent or 40 per cent in the tax year
2007-08). His or her net chargeable gains (after deduction of allowable
losses, taper relief, any other reliefs, and the annual exempt amount
(AEA)) are treated as the top slice of his or her income. Most trustees and
personal representatives are currently chargeable at the trust rate
(40 per cent for 2007-08).
8. For the tax year 2008-09, there will be a single rate of capital gains tax set
at 18 per cent as announced at 2007 PBR. The rate will have effect for
individuals, trustees and personal representatives. PBR Note 17 sets out
details of the proposals.
9. In addition on and after 6 April 2008, where the new entrepreneurs’ relief
is available it will reduce by 4/9ths the gains for which relief is due. Where
a number of gains and losses arise on the disposal of a business, the
reduction is applied to their aggregate. The net amount of gains after relief
will then be liable to CGT at the new 18 per cent single rate, resulting in
an effective 10 per cent rate (5/9ths x 18 per cent). An individual will be
entitled to entrepreneurs’ relief on gains of up to £1 million on qualifying
disposals. This £1 million limit is a “lifetime” limit. It will be necessary to
keep a record of the amount of gains in respect of which the relief is
claimed to work out the relief due on any later qualifying disposals.
10. There will be no minimum age limit for entrepreneurs’ relief. And
entrepreneurs’ relief will be available where the relevant conditions are
met throughout a qualifying period of one year.
Sole traders and partnerships
11. The relief will have effect for gains arising on the disposal by an individual
of the whole or part of a qualifying business. A business qualifies if it is a
trade, profession or vocation (including the commercial letting of furnished
holiday accommodation in the UK, but not other types of property letting
business). The individual must have owned the business, or be a
member of a partnership that owns the business, throughout the one-year
period ending with the disposal.
12. A disposal by a member of a partnership of the whole or part of his / her

interest in the partnership will also qualify if the partnership carries on a
qualifying business and the individual meets the ownership test
throughout the year ending with the disposal.

13. Where a qualifying business is not disposed of but simply ceases, relief
will be available on gains on assets in use in the business at the time it
ceased where the assets are disposed of within three years of the date of
cessation.
14. Gains on disposals by sole traders and partners of shares or securities or

on assets held as investments will not qualify for relief. But there are
circumstances in which relief will be available on the disposal of shares
and securities in a trading company and on “associated disposals”.
Details of these are set out below.
Shares and securities
15. The relief will have effect for gains on disposals of shares in (and
securities of) a trading company (or the holding company of a trading
group) provided that throughout a one-year qualifying period the individual
making the disposal:
• is an officer or employee of the company, or of a company in the same
group of companies; and
• owns at least 5 per cent of the ordinary share capital of the company
and that holding enables the individual to exercise at least 5 per cent
of the voting rights in that company.
16. Where the company (or group) does not cease to trade, the one-year
qualifying period is the year ending on the date the shares or securities
are disposed of. Where the company (or group) ceases to trade before
the disposal of the shares or securities, the one-year qualifying period
ends on the date trading ceased, and the disposal must be made within
three years of the date of cessation.
17. The terms “trading company”, “holding company” and “trading group” will
have the same meaning as they do for the purposes of taper relief on
business assets. There will be no requirement to restrict the gains
qualifying for relief by reference to any non-trading assets held by the
company (or group).
“Associated disposals”
18. Where an individual qualifies for entrepreneurs’ relief on a disposal of

shares or securities under paragraphs 15-17 above, relief will also be
available if the individual makes an “associated disposal” of an asset
which was used in the company’s (or group’s) business. For example, if a
company director who owns the premises from which the company carries
on its business sells the premises as well as selling his shares in the
company, the sale of the premises may count as an “associated disposal”
and the gain on the disposal may attract entrepreneurs’ relief. The relief
due on an associated disposal will be restricted in certain circumstances,
for example, where the asset in question is not wholly in business use or
where the individual is not involved in carrying on the business (as an
officer or employee of the company with a qualifying interest in it)
throughout the period during which the asset was owned.

19. A similar rule will allow relief on an “associated disposal” of an asset used
in a partnership’s business and owned separately by a member of the
partnership who is entitled to relief on disposal of his interest in the assets
of the partnership. Again, relief will be restricted in circumstances
equivalent to those indicated in the previous paragraph.
Deferred gains
20. It will be possible to claim relief where, on or after 6 April 2008:

• shares or securities are exchanged for other shares or securities
(including qualifying corporate bonds (QCBs)); and
• gains on disposal of the original shares or securities would meet the
qualifying conditions for relief; but gains do not arise at the time of the
exchange under the normal CGT rules for such exchanges.
21. Where QCBs are received in the exchange, entrepreneurs’ relief will be
claimable in determining the amount of gain to be deferred until the QCBs
are disposed of. In other cases people may elect to disapply the normal
CGT rules, so that gains will arise at the time of the exchange and the
relief will be claimable on those gains.
22. Similarly, where gains are deferred on or after 6 April 2008 as a result of
an investment in qualifying shares under the Enterprise Investment
Scheme (EIS), entrepreneurs’ relief will be claimable in determining the
amount of gains to be deferred.
23. Transitional rules will also allow entrepreneurs’ relief to be claimed where
gains that have been deferred on or before 5 April 2008 under the rules
for exchanges of shares, etc., for QCBs, or on investment under the EIS
or in a Venture Capital Trust (VCT) become chargeable on or after 6 April
2008. The relief will be claimable if the disposal giving rise to the gain
that has been deferred would have qualified for the relief if the relief had
been in force at the time of that disposal.
24. A further document has been published today on the HMRC website
containing examples of how the relief will work. Detail about the relief can
be found in the draft legislation and explanatory note available on the
HMRC website. Draft legislation relating to the changes to CGT
announced at Pre-Budget Report is also available on the HMRC website.
Further advice
25. If you have any questions about this change, please contact the Capital
Gains Tax Team on 020 7147 2764 (email:
capitalgains.taxteam@hmrc.gsi.gov.uk). Information about Budget
www.hmrc.gov.uk.

BN49
CHILD TRUST FUND: VOUCHER REQUIREMENT
1. Child Trust Fund (CTF) providers, CTF distributors and parents/guardians

who have received or will receive a CTF voucher.
2. Regulations will be laid in due course to remove the requirement for

providers and distributors to collect the CTF voucher from parents in order
to open a CTF account.
Operative date
3. The new account opening rules will have effect on and after 6 April 2009.
4. Under the current CTF Regulations (S.I. 2004/1450 as amended), the

applicant (parent) must give the voucher relating to the named child to the
account provider or distributor not later than 7 days after the expiry date on
the voucher. This allows the provider or distributor to open a CTF
account.
5. This measure will remove the need for the voucher to be collected by CTF
providers and distributors as part of the account opening process.
6. Instead of the parent handing over the voucher, CTF providers and
distributors will be able to open accounts using essential information from
the CTF voucher provided by the customer, such as the unique reference
number, the child’s date of birth and the voucher expiry date. This change
will allow, for example, telephone and internet applications for CTF
accounts to be made in a single paperless transaction without the need for
the customer to post the voucher separately.
7. This change will apply to all applications processed by providers or

distributors from 6 April 2009.
8. The measure allows those CTF providers and distributors who wish to
continue collecting the vouchers from parents to do so.
9. A public consultation paper was published on 24 October 2007 and a

summary of the consultation responses has been published today.

Further advice
10. If you have any questions about this change, please contact Anna Caffyn
on 020 7147 2855 (email: anna.caffyn@hmrc.gsi.gov.uk). Information

BN50
INDIVIDUAL SAVING ACCOUNTS AND NORTHERN ROCK

BANK
1. Investors who withdrew monies from their Northern Rock Individual

Savings Account (ISA) between 13 and 19 September 2007 inclusive; and
ISA providers.
2. Legislation will be included in Finance Bill 2008 to allow individuals who

withdrew cash from their Northern Rock ISAs between 13 and
19 September 2007 to reinvest them in a new ISA. This measure was
announced on 18 October 2007.
Operative date
3. Investors can make the re-investment between 18 October 2007 and

5 April 2008.
4. Under the powers in sections 694 to 701 Income Tax (Trading and Other
Income) Act 2005 (ITTOIA), The Individual Savings Account Regulations
1998 (SI 1998 No 1870 as amended) provide the rules and regulations for
the ISA scheme.
5. The existing ISA Regulations stipulate that an investor cannot subscribe

more than £3,000 to a cash ISA in any one tax year. And they do not,
except in the limited circumstances of in-year self transfers by investors,
allow for any re-investment of withdrawn funds with another ISA manager
other than as a subscription and subject to the annual subscription limit.
They stipulate that a transfer can only be made directly between one ISA
account manager and another.
6. As part of this measure, the ISA Regulations will be amended so that:

• Qualifying Northern Rock investors can re-invest their withdrawn
funds with the same or a different ISA provider; and
• The re-investment does not count towards that investor’s annual
ISA subscription limit.

7. Any re-investment of monies withdrawn from Northern Rock will not have
any impact upon an investor’s annual ISA investment limit, which is
subject to the normal ISA subscription rules. Furthermore, any
re-investment made with a new ISA provider is to be treated as a transfer
to that provider rather than a subscription.
8. The new rule will apply only to people who withdrew funds from their
Northern Rock ISA between 13 and 19 September 2007, and the
re-investments have to be made no later than 5 April 2008. This means
that the changes to the ISA regulations described above will need to have
retrospective effect, but the existing powers in ITTOIA do not explicitly
provide for this.
9. So, in order to make the necessary changes to the ISA Regulations the
powers in ITTOIA will need to be amended, and legislation will be
introduced in Finance Bill 2008 to provide for this. The retrospective power
being introduced in the Finance Bill is to have effect only if the use of the
power is to the benefit of the taxpayer.
10. The amending ISA Regulations, will be laid as soon as possible after the
date that Finance Bill 2008 has received Royal Assent.
11. Details of the Government announcement made on 18 October 2007 can

be found on HM Treasury’s website at www.hm-treasury.gov.uk
Further advice
12. If you have any questions about this change, please contact David Ensor
on 0207 147 2838 (email: david.ensor@hmrc.gsi.gov.uk). Information

BN51
INDIVIDUAL SAVING ACCOUNTS AND OTHER SAVING

ACCOUNTS: REDUCING THE ADMINISTRATIVE BURDEN
1. This measure will affect:

• Individual Saving Account (ISA) managers who make quarterly
statistical ISA reports to HM Revenue & Customs (HMRC);
• financial institutions that receive applications from:
o ISA investors;
o UK non-taxpayers for payment of interest gross; and
o individuals not ordinarily resident in the UK for payment of
interest gross.
Quarterly statistical reports
2. This measure will remove the requirement for ISA managers to submit
quarterly returns of statistical information to HMRC (detailing subscriptions
received) on and after 6 April 2008. Instead, ISA managers will make an
annual statistical return detailing subscriptions received after the end of
each tax year. The requirement on ISA managers to make an annual
‘market value’ return will remain.
Retention of application forms
3. The requirement for ISA managers to retain the copy of an investor’s

application for an ISA will also cease. Similarly, financial institutions who
operate the Tax Deduction Scheme for Interest (TDSI) will no longer have
to retain applications from investors for:
• gross payment of interest by UK non-taxpayers (Form R85); and
• gross payment of interest by not-ordinarily resident individuals
(Form R105).
4. Instead, ISA managers and financial institutions that choose not to retain
forms will be required to record the information contained in the application
and a send a written copy of confirmation to the customer. The original
application can then be destroyed.
Changes to Regulations
5. The existing regulations which cover the operation of the TDSI will be
consolidated.
6. A number of changes to the ISA Regulations will be made to remove

obsolete references and update other references.

Operative date
7. For ISAs, these changes will have effect on and after 6 April 2008. For
TDSI, the changes will have effect later in the year on and after a date to
be determined in regulations made by the Commissioners for
HM Revenue and Customs.
ISA Returns of Statistical Information
8. Under the ISA Regulations, managers are required to make a quarterly

return of statistical information to HMRC’s Savings Schemes Office within
one month of 5 July, 5 October, 5 January and 5 April in each tax year.
The returns are made on form ISA 25(Stats) and provide cumulative
details of ISA subscriptions.
9. Managers also have to make an annual return of statistical information

within 60 days of the end of the tax year. The annual return (made on the
form ISA 14(Stats)) provides details of the market values of the qualifying
investments held in ISAs. This type of return is described as a ‘market
value’ return.
10. The ISA Regulations will be amended so that on and after 6 April 2008
HMRC will cease collecting quarterly statistics and will, instead, collect a
single ‘subscription return’ at the end of the tax year, which HMRC will use
to publish annual subscription statistics. Managers will still be required to
make an annual ‘market value return’ within 60 days of the end of the tax
year.
Removing the requirement to retain copies of applications
11. Under the ISA Regulations, managers are required to retain either paper
forms or electronically scanned copies of an investor’s written ISA
application. On and after 6 April 2008, ISA managers will have the option
of treating a written application in the same way as they would a
non-written one. The manager would transfer all of the details from the
written application form onto their systems, send a written confirmation of
the declaration to the investor and retain a record that the confirmation has
been sent. The ISA manager could then destroy the signed application.
12. Financial institutions that operate TDSI are required to retain either paper
forms or electronically scanned copies of the application to receive gross
payment of interest from UK non-taxpayers or not-ordinarily resident
individuals. Financial institutions will be given the option of treating a
written application in the same way as they would a non-written one (for
example, an application by telephone or via the internet). The financial
institution would transfer all of the details from the written application form
onto their systems, send a written confirmation of the declaration to the
saver and retain a record that the confirmation has been sent. The
financial institution could then destroy the signed application.

Consolidation of the regulations that cover the TDSI
13. The existing regulations which cover the operation of the Tax Deduction
Scheme for Interest (1990/2231 (Building Society Regulations), 1990/2232
(Deposit-taker Regulations), 1992/10 (Building Society Audit Regulations)
and 1992/12 (Deposit-taker Audit Regulations)) will be consolidated into a
single set of regulations to be laid later in the year. These regulations will
include the change to give financial institutions who operate TDSI the
option of treating a written application in the same way as they would a
non-written one.
Minor drafting changes to the ISA regulations
14. There are a number of minor drafting changes being made to the ISA
regulations. These changes are to remove obsolete references and to
update legislative references following the Tax Law Rewrite Acts. These
changes will have no impact on individuals or providers.
Further advice
15. If you have any questions about these changes, please contact David
Ensor on 020 7147 2838 (email: david.ensor@hmrc.gsi.gov.uk).

BN52
GIFT AID: TRANSITIONAL RELIEF
1. UK Charities and Community Amateur Sports Clubs (CASCs) that claim

repayments of tax in respect of qualifying Gift Aid donations, and
charitable intermediaries making claims on their behalf.
2. Charities and CASCs making Gift Aid repayment claims will be entitled to
a transitional relief relating to qualifying Gift Aid donations made in the tax
years 2008-09 to 2010-11. The transitional relief will be paid by
HM Revenue & Customs (HMRC) when a claim for repayment of tax made
within specific timescales is allowed.
Operative date
3. The relief will have effect for Gift Aid repayment claims that relate to
qualifying donations made on and after 6 April 2008 until 5 April 2011.
4. Gift Aid claims for donations made on and after 6 April 2008 will continue
to be processed as previously but using the new 20 per cent basic rate of
income tax.
5. For Gift Aid claims allowed on or after the date that both the Finance Bill
2008 and the Appropriation Bill 2008 receive Royal Assent, HMRC will pay
the transitional relief at the same time as the related Gift Aid repayment.
For claims allowed before both these pieces of legislation receive Royal
Assent, HMRC will pay the Gift Aid repayment as usual, and will pay the
transitional relief after Royal Assent.
6. Legislation will be introduced in Finance Bill 2008 to supplement current

Gift Aid legislation for charities and CASCs, as a consequence of the
reduction of the basic rate of income tax from 6 April 2008.
7. This legislation will require HMRC to pay a transitional relief supplement to

charities and CASCs based on qualifying Gift Aid donations shown on
claim form R68 if the claim is allowed. The relief for claims made before
the date of Royal Assent of the Finance Bill and Appropriations Bill will be
paid separately by HMRC without the need for an additional claim by
charities or CASCs.

8. The rate of the transitional relief supplement will be 2 per cent and will be
applied to qualifying donations made in the years 2008-09, 2009-10 and
2010-11.
9. The relief will be calculated by grossing up the donation by the sum of the
basic rate and the rate of supplement. The amount of relief due will be the
difference between that figure and the amount of the donation grossed up
at the basic rate of tax.
10. Charities and CASCs will be eligible to receive payments of the Gift Aid
transitional relief in respect of Gift Aid repayment claims allowed by HMRC
providing that the claim on form R68 is made:
• for charitable trusts, up to two years after the end of the tax year to
which the claim relates; and
• for charitable companies or CASCs, up to two years from the end of
the accounting period to which it relates.
11. The amount of the transitional relief will be limited by the amount of
qualifying donations, so will increase or decrease as levels of qualifying
Gift Aid donations received by a charity increase or decrease.
12. Information about responses to the recent Gift Aid consultation is available
on the HM Treasury website at www.hm-treasury.gov.uk.
Further advice
13. If you have any questions about this change, please contact John Neale
on 0207 147 2704 (email: john.neale@hmrc.gsi.gov.uk). Information about
www.hmrc.gov.uk

BN53
INCOME OF BENEFICIARIES UNDER SETTLOR-INTERESTED

TRUSTS
1. Individuals who receive discretionary income payments from a

settlor-interested trust and who also receive savings or dividend income.
2. Legislation will be introduced in Finance Bill 2008 to rectify an unintended

consequence of the Trusts Modernisation legislation in Finance Act 2006.
Operative date
3. The measure will have effect on or after 6 April 2006 (the date on and after
which this part of the Trusts Modernisation legislation has effect).
4. The income of a ‘settlor-interested’ trust is deemed, for the purposes of

income tax, to be the settlor’s income. Tax paid by the trustees of such
trusts is treated as paid on behalf of the settlor. This is in contrast to other
trusts where the tax paid by trustees is available to the beneficiaries. To
avoid the double taxation which would otherwise result, section 685A of
the Income Tax (Trading and Other Income) Act 2005 provides that
income paid by trustees of a settlor-interested trust to (non-settlor)
beneficiaries comes with a non-repayable ‘notional’ tax credit equal to the
higher rate of tax (currently 40 per cent) which covers all the tax liability on
that income.
5. However, under current statutory ordering rules income from a trust is

charged before savings and/or dividend income. The result is that a
beneficiary of such a trust who also has savings and/or dividend income
may find that the non-trust income is pushed into higher rates so that more
tax is due overall.
6. The measure amends this ordering rule, such that income from a
settlor-interested trust is treated within section 1012 of the Income Tax Act
2007 as one of the highest slices of income.

Further advice
7. If you have any questions about this change, please contact Kyri
Souppouris on 020 7147 2760 (email: kyri.souppouris@hmrc.gsi.gov.uk).

BN54
STAMP DUTY: CHANGES TO LOAN CAPITAL EXEMPTION
1. Individuals and companies wishing to invest in debt securities on the

capital markets.
2. Legislation will be introduced in Finance Bill 2008 to provide exemption

from stamp duty on transfers of loan capital, which are subject to a capital
market arrangement on limited recourse terms.
Operative date
3. These changes will have effect for transfers of loan capital on or after the
4. Section 79(4) of the Finance Act 1986 currently exempts from stamp duty
most forms of loan capital. But where the right to interest on a loan capital
instrument is determined to any extent by the results of a business or
value of any property, the exemption does not apply and transfers of that
loan capital are subject to ad valorem stamp duty.
5. This measure will provide that where the loan capital instrument does not
meet the exemption criteria for the reasons described above, it will
nevertheless qualify for exemption from stamp duty if it is also (a) party to
a capital market arrangement and (b) the right to interest is on limited
recourse terms.
Further advice
6. If you have any questions about this change, please contact Nicky Rass
on 020 7147 2802 (email: Nicola.Rass@hmrc.gsi.gov.uk). Information

BN55
REDUCTION OF STAMP DUTY ADMINISTRATIVE BURDEN
1. Any person who executes stock transfer forms or other written instruments
to transfer ownership of stock or marketable securities.
2. Legislation will be introduced in Finance Bill 2008 to provide that

instruments transferring stocks and shares that were previously
chargeable with £5 stamp duty will in future be exempt and will not need to
be presented to HM Revenue & Customs (HMRC) for stamping.
Operative date
3. The measure will have effect for instruments executed on or after

13 March 2008.
4. Under Schedule 13 to the Finance Act 1999, where a transfer of

ownership of stocks or marketable securities is effected by a written
instrument, the instrument must first be presented to HMRC for stamping
with the appropriate amount of stamp duty. Company registrars are not
allowed to amend share registers to reflect a change of owner unless the
instrument has either been stamped or bears a certificate that it is not
chargeable with duty.
5. The law provides for ad valorem stamp duty to be charged on an

instrument transferring shares on sale, at the rate of 0.5 per cent of the
amount of the consideration given for the shares, rounded up to the
nearest £5. Where the consideration is £1,000 or less, the duty payable is
therefore limited to £5. There is also a fixed £5 stamp duty charge for
instruments transferring shares otherwise than on sale.
6. 68 per cent of transfer instruments currently presented, attract the

minimum stamp duty charge of £5 and the cost to business of submitting
them for stamping is high. Changes to be made by primary legislation will
therefore exempt transfer instruments that would previously have attracted
stamp duty of no more than £5, whether fixed or ad valorem. These
instruments may therefore in future be sent direct to the company registrar
without first being presented to HMRC.

7. Further guidance has been published today on the HMRC website.
Further advice
8. If you have any questions about this change, please contact Miles
Harwood on 020 7147 2801 (email: miles.harwood@hmrc.gsi.gov.uk).

BN56
STAMP DUTY LAND TAX (SDLT): RELIEF FOR NEW

ZERO-CARBON FLATS
1. Buyers of new zero-carbon flats, and Government departments carrying

out assessments on whether a home qualifies for the relief.
2. A regulation making power was introduced in Finance Act 2007 which

brought in a time-limited relief from stamp duty land tax (SDLT) for new
zero-carbon homes.
3. Legislation will be introduced in Finance Bill 2008 to extend this relief to

cover new zero carbon flats. As a result of this change, existing
secondary legislation will have retrospective effect to extend the relief for
any new flats.
4. The measure will also ensure that where a Government department

carries out an assessment of whether a home meets the zero-carbon
standard it is to be permitted to charge a reasonable fee for providing such
service. This part of the measure will have effect from later this year when
regulations are laid.
Operative date
5. The relief for new flats will have effect on and after 1 October 2007. The
relief will be time-limited and will expire on 30 September 2012.
6. The provision allowing Government departments to charge a fee for

assessing whether a home meets the zero-carbon standard will have
effect from a date to be appointed by Treasury order.
7. Legislation for SDLT is in Finance Act (FA) 2003. Section 19 of FA 2007

introduced regulation making powers bringing a new relief to provide for
zero-carbon homes.
8. Qualifying criteria for the relief are set out in the Stamp Duty Land Tax
(Zero-Carbon Home) Regulations 2007 (SI 2007/3437) and require the
level of carbon emissions from energy use in the home to be zero over the
course of a year. As with other homes, the vendor of a new zero-carbon
flat should provide a certificate confirming that it qualifies for the relief.

9. The relief will be eligible only to new flats which are liable to SDLT on their
first sale. The relief will not be available on second and subsequent sales
or on existing flats even when converted to meet the zero-carbon criteria.
10. The relief will provide complete removal of SDLT liabilities for all new zero-
carbon flats up to a purchase price of £500,000. Where the purchase
price of the flat is in excess of £500,000 then the SDLT liability will be
reduced by £15,000. The balance of the SDLT liability will be due in the
normal way.
11. The regulations –The Stamp Duty Land tax (Zero-Carbon Homes Relief)
Regulations 2007 – came into force on 7 December 2007. Legislation to
be introduced in Finance Bill 2008 will amend section 19 of FA 2007 so
that the power to make regulations extends to include new flats. Further
regulations will be laid after Finance Bill 2008 receives Royal Assent to
provide for a fee to be charged by a Government department and to clarify
the position in respect of certificates for any qualifying flats brought prior to
the amendments to the section 58B of FA 2003.
Further advice
12. More details about how the current relief for new zero-carbon homes
operates can be found on the HM Revenue & Customs website.
13. If you have any questions about this change, please contact Michael Lyttle
on 020 7147 2792 (e-mail: michael.lyttle@hmrc.gsi.gov.uk). Information

BN57
STAMP DUTY LAND TAX (SDLT): NOTIFICATION

THRESHOLDS FOR LAND TRANSACTIONS AND RATE
THRESHOLDS FOR LEASEHOLD PROPERTY
1. Persons entering into land transactions (including linked land transactions)

where the chargeable consideration is less than £40,000.
2. Persons entering into transactions in respect of a lease for a period of

seven years or more where the grant, assignment or surrender of the
lease is made for a chargeable consideration (other than rent) of less than
£40,000 and the rent is less than £1,000.
3. Persons affected by the rules that HM Revenue & Customs (HMRC)

introduced to prevent manipulation of thresholds where both rent and
premium are payable on a lease (the “£600 rule”).
4. Legislation will be introduced in Finance Bill 2008 to change the rules for
persons notifying HMRC about land transactions. The “£600 rule” will also
be changed and, from later this year, agents will be allowed to sign
declarations in the certificate that no stamp duty land tax (SDLT) is due.
Operative date
5. The revised notification thresholds on land transactions and the changes

to the “£600 rule” will have effect for transactions on and after
12 March 2008.
6. The change to SDLT forms allowing agents to sign the declaration in the
certificate that no stamp duty land tax is due on behalf of their clients will
be made by regulations in due course.
SDLT thresholds
7. SDLT is charged, at varying rates, on the consideration given for a land

transaction. At present, as a general rule, no tax is payable on
transactions in residential property if the consideration does not exceed
£125,000 (and on transactions in non-residential property if the
consideration does not exceed £150,000). Tax is payable at 1 per cent if
the consideration exceeds £125,000 for residential properties (or £150,000
for residential properties which can claim disadvantaged area relief, and

non-residential properties) but does not exceed £250,000. Tax is payable
at 3 per cent if the consideration exceeds £250,000 but does not exceed
£500,000, and at 4 per cent for consideration above £500,000.
8. HMRC must be notified about most transactions involving the acquisition

of a major interest in land for consideration unless specifically exempted.
This measure will raise the threshold for when a person has to notify
HMRC of a land transaction.
9. Leases must be notified if the lease is for a period of seven years or more
and the grant is made for a chargeable consideration. Leases should also
be notified when they are granted for periods of less than seven years but
tax is chargeable at a rate of 1 per cent or higher on either or both any
premium or rent paid. This also applies in circumstances where there
would have been tax chargeable at a rate of 1 per cent or higher but for
the availability of a relief.
10. Since most transactions currently have to be notified to HMRC, many of

the transactions notified are ones where no SDLT is payable.
11. This measure will raise the current threshold for notification of non-
leasehold transactions from chargeable consideration of £1,000 to
£40,000.
12. Transactions involving leases for a term of seven years or more will only
have to be notified where any chargeable consideration other than rent is
more than £40,000 or where the annual rent is more than £1,000.
13. Moreover, further changes will mean that it will no longer be necessary to
complete either a stamp duty land tax return (HMRC form SDLT1) or
certificate that no stamp duty land tax is due (HMRC form SDLT 60) if the
transaction is below the notifiable threshold.
The “£600 rule”
14. Provisions in the Finance Act 2003 prevent the manipulation of lease
thresholds and apply to leases where payment is made by both rent and a
premium when the lease is signed. The rule states that where the annual
rent on a lease is more than £600, then the normal 0 per cent thresholds
that would have effect, £125,000 for residential property and £150,000 for
non-residential property, are withdrawn and SDLT is charged at 1 per cent.
This measure will amend these rules as follows:
• for non-residential properties where the annual rent on a lease is
£1,000 or more then the normal 0 per cent threshold that would have
effect at £150,000 is withdrawn and SDLT is charged at 1 per cent; and
• for residential properties the rule will no longer have effect and,
regardless of what rent is paid, the normal thresholds will have effect to
any premium paid. This amendment will also have effect in respect of
disadvantaged areas relief.

The certificate that no stamp duty land tax is due (form SDLT 60)
15. The HMRC form prescribed by regulations does not permit agents to sign
the certificate that no SDLT is due on behalf of their clients (form SDLT
60). The form can only be signed by the person making the transaction.
HMRC will amend that form by regulations later in 2008 so that agents will
be able to sign the declaration in the certificate on behalf of their clients.
Draft legislation
Further advice
17. If you have any questions about this measure, please contact the Stamp
Taxes Help Line on 0845 603 0135. Information about Budget measures is

BN58
STAMP DUTY LAND TAX (SDLT): ANTI-AVOIDANCE

LEGISLATION AFFECTING PARTNERSHIPS
1. Property investment partnerships that purchase interests in property in the

United Kingdom.
2. Legislation will be introduced in Finance Bill 2008 to amend provisions

inserted in Finance Act (FA) 2003 by FA 2007 to ensure that, where there
is a transfer of an interest in a property within an investment partnership,
there will be no charge to SDLT.
Operative date
3. The measure will be retrospective and have effect for transactions that
occurred on and after 19 July 2007 (the date that Finance Bill 2007
received Royal Assent).
4. Legislation in FA 2007 tackled schemes which allowed payment of SDLT

to be avoided by using provisions in the then existing SDLT legislation
intended to help the transfer of property between different partners within
an investment partnership. The following parts of SDLT legislation within
the Finance Act 2003 were amended:
• the charge on transfers into partnerships set out in paragraphs 10-12
of Schedule 15;
• the charge on transfers out of partnerships set out in paragraphs
18-20 of Schedule 15; and
• the charge on transfers of an interest in a property-investment
partnership set out in paragraph 14 of Schedule 15.
5. The legislation in FA 2007 affected property investment partnerships by

ensuring that each time there was a change in the size of share held within
the property investment partnership there was a charge for SDLT
regardless of whether there was any consideration paid for the change
and regardless of whether the parties involved in the transaction were
connected to each other in any way. Previously, provisions in SDLT
legislation to help ease the movement of property between partners had
been used to relieve these transactions of the charge to SDLT that would
have been due on transactions involving transfers between partners.

6. The legislation in Finance Bill 2008 will amend the provisions in FA 2003
inserted by FA 2007 in order to ensure that where there is a transfer of an
interest in a property within an investment partnership, there will be no
charge to SDLT.
Further advice
7. If you have any questions about this measure, please contact Michael
Lyttle on 020 7147 2792 (email: michael.lyttle@hmrc.gsi.gov.uk).

BN59
STAMP DUTY LAND TAX (SDLT): GROUP RELIEF:

ANTI-AVOIDANCE
1. Groups of companies seeking to avoid payment of stamp duty land tax

(SDLT) on large commercial transactions.
2. Legislation will be introduced in Finance Bill 2008 to amend provisions that

enable groups to transfer assets within a group and then sell the
purchasing company on to a third party without incurring SDLT.
Operative date
3. This change will have effect for any transaction the “effective date” of
which is on or after 13 March 2008. The effective date is normally the date
of completion not the date of exchange of contracts. However, the
effective date may be earlier than the date of completion if the contract is
“substantially performed”, for example, if the purchaser takes possession
or pays the purchase price in advance of completion. Most residential
contracts will not be “substantially performed” in advance of completion.
4. Paragraph 1 of Schedule 7 to the Finance Act 2003 allows companies to

claim group relief on transfers of assets between group members.
5. A restriction is placed on the relief where a property is transferred to a

group company and the purchaser then ceases to be a member of the
same group as the vendor. HM Revenue & Customs (HMRC) can then
“claw back” any group relief.
6. HMRC have identified a number of avoidance schemes structured to avoid

the “clawback” provisions in the legislation. The transactions are structured
in such a way that it is the vendor who leaves the group first, thereby
allowing the purchasing company to subsequently leave the group without
there being any “clawback” of SDLT group relief.
7. This legislation will have effect where the vendor leaves the group and
there is then a subsequent change in the control of the purchaser within a
period of three years of the asset having been transferred. The provision
will enable HMRC to link these two events and treat the purchaser as
having left the group first.

8. Group relief will not be clawed back where only the vendor leaves the
group.
Further advice
10. If you have any questions about this change, please contact Yasmin Ali on
020 7147 2804 (email: yasmin.ali@hmrc.gsi.gov.uk). Information about
www.hmrc.gov.uk

BN60
STAMP DUTY LAND TAX (SDLT): ALTERNATIVE FINANCE:

ANTI-AVOIDANCE
1. Parties to schemes designed to avoid payment of stamp duty land tax

(SDLT).
2. Legislation will be introduced in Finance Bill 2008 to prevent abuse where

financial institutions assist parties to avoid payment of SDLT.
Operative date
3. This change will have effect for any transaction the “effective date” of
which is on or after 12 March 2008. The effective date is normally the date
of completion not the date of exchange of contracts. However, the
effective date may be earlier than the date of completion if the contract is
“substantially performed”, for example, if the purchaser takes possession
or pays the purchase price in advance of completion. Most residential
contracts will not be “substantially performed” in advance of completion.
4. Sections 71A, 72, 72A and 73 of Finance Act 2003 were introduced in
2005 to encourage the use of alternative finance structures that did not
use conventional mortgage schemes to buy property.
5. Section 71A (2) allows an exemption from SDLT where there is a

purchase by the lender from the borrower. Section 72 allows the
equivalent exemption in Scotland. These equate to schemes where
someone takes a mortgage out on what was a previously mortgage free
property. The legislation also exempts a purchase by the lender from the
borrower where there is a re-mortgage. (Sections 72A and 73 allow the
Scottish equivalents of these types of exemptions.)
6. Some financial institutions have misused these two exemptions from SDLT
by colluding with vendors so that ownership of a property is placed in a
subsidiary company of the financial institution. The subsidiary then claims
that the transaction is intended for the purposes of allowing the equivalent
of mortgaging on a mortgage free property or re-mortgaging.
7. Once ownership of the property has passed from the vendor to the
subsidiary, however, the financial institution can then sell the property
without incurring any SDLT by selling shares in the subsidiary company.

8. New provisions will ensure that relief under sections 71A or 72 will not be
available if there are arrangements in place for a person to acquire control
of the financial institution.
Further advice
10. If you have any questions about this change, please contact Michael Lyttle
on 020 7147 2792 (email: michael.lyttle@hmrc.gsi.gov.uk). Information

BN61
GREATER LONDON AUTHORITY SEVERANCE PAY
1. Members of the Greater London Authority (GLA) and the Mayor of London.
2. Legislation will be introduced in Finance Bill 2008 to ensure that payments

under the new GLA severance pay scheme will be tax-exempt up to the
first £30,000 thereby bringing their tax treatment into line with that of
payments under similar schemes for Westminster MPs and members of
the devolved administrations.
Operative date
3. The legislation will have effect on and after 6 April 2008.
4. Payments currently fall within section 62 of the Income Tax (Earnings and
Pensions) Act 2003 (ITEPA) and would be taxed in full.
5. Legislation in Finance Bill 2008 will ensure that the payments are treated
as termination payments by an amendment of section 291 of ITEPA.
Further advice
6. If you have any questions about this change, please contact Peter
Seedhouse on 020 7147 2529 (email: peter.seedhouse@hmrc.gsi.gov.uk).

BN62
ARMED FORCES COUNCIL TAX RELIEF
1. Members of the Armed Forces serving in operational locations specified by

the Ministry of Defence.
2. Legislation will be introduced in Finance Bill 2008 to ensure that payments

under the new Armed Forces Council Tax Relief scheme will be
tax-exempt.
Operative date
3. The legislation will have effect on and after 1 April 2008.
4. Payments currently fall within section 62 of the Income Tax (Earnings and
Pensions) Act 2003 (ITEPA) and would be taxed in full.
5. Legislation in Finance Bill 2008 will ensure that the payments will be
specifically exempt from tax by the insertion of a further exemption at Part
4 of Chapter 8 (Exemptions: Special Kinds of Employees) of ITEPA.
Parallel disregards are being introduced in secondary legislation for
National Insurance contributions and Tax Credits purposes.
Further advice
6. If you have any questions about this change, please contact the Employer

BN63
RESTRICTIONS ON TRADE LOSS RELIEF FOR INDIVIDUALS
1. Individuals who carry on a trade but spend an average of less than 10

hours a week on commercial activities of that trade.
2. Legislation will be introduced in Finance Bill 2008:

• to counteract the use of contrived arrangements that generate trade
losses which may be claimed as sideways relief or capital gains relief
(“sideways loss relief”) by an individual, other than a partner, carrying
on a trade in a non-active capacity; and
• to amend the definition of a non-active partner for the purpose of
restrictions to sideways loss relief.
Operative date
3. These changes will have effect on and after 12 March 2008.
4. Individuals who are carrying on a trade can, subject to certain restrictions,

set off their trading losses against other income and gains. This is
commonly known as sideways loss relief.
5. Section 26 of and Schedule 4 to the Finance Act 2007 introduced

legislation to counteract the use of partnership arrangements that generate
trade losses for use as “sideways loss relief” by a non-active or limited
partner.
6. Since then HM Revenue & Customs has seen, through the tax avoidance
disclosure regime and otherwise, evidence of arrangements of a similar
nature based on individuals acting as traders on their own account rather
than as partners.
7. Legislation will be introduced in Finance Bill 2008 to restrict the amount of

sideways loss relief that can be claimed by an individual, other than a
partner, carrying on a trade in a non-active capacity. Where a loss arises
to an individual carrying on a trade in a non-active capacity as a result of
tax avoidance arrangements made on or after 12 March 2008, no
sideways loss relief will be available for that loss. Otherwise there will be
an annual limit of £25,000 on the total amount of sideways loss relief that
an individual may claim from trades carried on in a non-active capacity.

8. For these purposes an individual, other than a partner, carries on a trade
in a non-active capacity where the individual spends an average of less
than 10 hours a week, in a relevant period, personally engaged in activities
of the trade carried on commercially and with a view to the realisation of
profits from those activities.
9. The restrictions will not apply to losses that derive from qualifying film
expenditure, broadly losses that derive from film reliefs in sections 137 to
140 of the Income Tax (Trading and Other Income) Act 2005, or to losses
of a Lloyd’s underwriting business.
10. Transitional rules will apply to the computation of losses subject to the
annual limit where these arise for an individual’s basis period which begins
before 12 March 2008 and ends on or after that date.
11. Legislation will also be introduced to align the meaning of non-active

partner for the purposes of restrictions to sideways loss relief with the
meaning of non-active capacity.
Further advice
13. If you have any questions about this change, please contact Peter Lees on
028 9093 9812 (email: peter.lees@hmrc.gsi.gov.uk). Information about
www.hmrc.gov.uk

BN64
DOUBLE TAXATION RELIEF: INCOME TAX
1. Individuals who receive income as part of a trade or profession that is

subject to foreign tax.
2. Legislation will be introduced in Finance Bill 2008 to ensure that the credit
for any foreign tax paid on trade or professional earnings is no more than
the UK income tax due in respect of the same earnings.
Operative date
3. The legislation will have effect for income arising on or after 6 April 2008
and for foreign tax paid on or after 6 April 2008.
4. The legislation will clarify the way that section 796 of the Income and
Corporation Taxes Act 1988 defines the maximum credit available against
UK income tax in respect of foreign taxes.
5. This measure will confirm existing practice and is in keeping with the
changes made in 2005 to the corporation tax regime. It will remove doubts
about the basis of foreign tax credit following recent case law.
Further advice
6. If you have any questions about this change, please contact Andrew Page
on 020 7147 2673 (email: andrew.page@hmrc.gsi.gov.uk). Information

BN65
AVOIDANCE OF INCOME TAX USING MANUFACTURED

PAYMENTS
1. Individuals who pay manufactured payments as part of a scheme or

arrangements to gain a tax advantage.
2. Legislation will be introduced in Finance Bill 2008 to stop individuals

avoiding income tax by making manufactured payments. Manufactured
payments are payments representative of interest or dividends payable on
securities, such as gilts or shares, arising in the course of a sale and
repurchase (‘repo’) or stocklending arrangements.
Operative date
3. The legislation was announced by Ministerial statement on

31 January 2008 and will have effect on and after that date.
4. Under current law, individuals who make manufactured payments are

generally able to obtain relief for the payments against their general
income. This has given rise to a range of avoidance schemes whose
object is to secure relief for the payments against their general income.
5. The legislation will introduce a targeted anti-avoidance rule that denies

relief for any manufactured payment paid as part of a scheme or
arrangements where one of the main purposes is to secure a tax
advantage.
Further advice
6. If you have any questions about this change, please contact Richard
Rogers on 020 7147 2625 (email: richard.rogers@hmrc.gsi.gov.uk).

BN66
DOUBLE TAXATION TREATY ABUSE
1. UK residents who are participating in the avoidance scheme described

below.
2. UK residents are taxable on their income wherever it arises. A wholly

artificial scheme seeks to avoid UK tax by artificially diverting income of a
UK resident individual to a foreign partnership comprised of foreign
trustees. The scheme is designed to ensure that the income nonetheless
continues to belong to the UK resident as they will be a beneficiary of the
foreign trust. Legislation will be introduced in Finance Bill 2008 to:
• clarify, retrospectively, legislation introduced in 1987, which itself
was retrospective, so that it has effect as intended. This will ensure
that, notwithstanding the wording of any double taxation treaty, UK
residents pay UK tax on their profits from foreign partnerships; and
• prevent tax avoidance through the misuse of Double Taxation
Treaties by UK residents.
Operative date
3. The first measure will be treated as having always had effect. The second
will have effect for income arising on or after 12 March 2008.
4. UK law taxes a UK resident beneficiary of certain trusts on the income to

which they are entitled under the trust arrangement as it arises. This
means that, in cases exploiting the above avoidance scheme, the UK
resident should be taxable in the UK on his or her share of the profits of
the partnership comprised of the foreign trustees.
5. But the users of the scheme claim that a provision, known as the Business
Profits Article, common to most tax treaties, exempts the partnership
profits from UK tax – not only in the hands of the foreign partners but also
in the hands of the UK beneficiaries.
6. The first provision will make clear that (in line with retrospective legislation
introduced in Finance (No2) Act 1987) tax treaties do not exempt UK
residents from UK tax on any profits of a foreign partnership to which they
are entitled.

7. The second measure will ensure that the Business Profits Article in the
UK’s tax treaties cannot be read as preventing income of a UK resident
being chargeable to UK tax.
Further advice
9. If you have any questions about this change, please contact Martin Brooks
on 020 7147 2651 (email: martin.brooks@hmrc.gsi.gov.uk) or Simon Davis
on 020 7147 2666 (email: simon.davis@hmrc.gsi.gov.uk). Information

BN67
TAX AVOIDANCE DISCLOSURE REGIME: SCHEME

REFERENCE NUMBER SYSTEM
1. Promoters of tax avoidance schemes, including accountancy and law

firms, banks and other financial institutions, and their clients.
2. Legislation will be introduced in Finance Bill 2008 to improve the existing

system of identifying users of disclosed tax avoidance schemes through
the Scheme Reference Number (SRN) system.
Operative date
3. The legislation will contain substantive provisions and powers to make

regulations. They will have effect on and after separate dates to be
appointed by Treasury order.
4. Part 7 of Finance Act 2004 and regulations made under it require

promoters of tax schemes falling within certain descriptions to provide
information to HM Revenue & Customs (HMRC) about those schemes
(“disclose the scheme”) within prescribed time limits.
5. Section 308(4) (“the co-promoter rule”) relieves a promoter of the

obligation to disclose where there is more than one promoter in relation to
the same scheme and another promoter has disclosed it.
6. Section 311 provides for HMRC to issue a SRN to a promoter who

discloses a scheme. Section 312 requires the promoter to pass the SRN
on to clients who implement the scheme. Section 313 requires a client
who uses the scheme to obtain a tax advantage to report it to HMRC
within time limits. Section 316 provides for HMRC to specify (i.e. in
guidance) the form and manner in which information is to be provided.
7. The information required and the time by which that information must be
provided are prescribed under Part 7 in the Tax Avoidance Schemes
(Information) Regulations (SI 2004/1864, as amended).
8. Legislation will be introduced in Finance Bill 2008 to ensure that a user of

a disclosed scheme is supplied with the SRN issued to the promoter who
has disclosed it.

9. The co-promoter rule will be amended so that co-promoters are only
relieved of the obligation to disclose a scheme under one of the new
procedures set out in paragraph 10. Each co-promoter will be required to
pass on the SRN to its clients.
10. The new procedures will be either:

• a promoter (P1), when disclosing a scheme, notifying HMRC of any
co-promoters (P2) and providing those co-promoters with a copy of
the disclosure – HMRC will notify the SRN to those co-promoters
under an amended section 311; or
• P1 notifying the SRN to any further co-promoters, and providing
them with a copy of the disclosure.
11. The existing legislation requires a promoter to pass the SRN to a client
when the client implements the scheme. In practice, promoters often pass
the SRN on earlier, as soon as they make the scheme available to clients.
The legislation will be amended to ensure that clients who use a scheme
have to report to HMRC SRNs received via this non-compulsory route.
12. HMRC will use the existing powers in section 316 to require promoters to
use an HMRC form to pass the SRN to clients. The form will provide the
client with key information about what to do with the SRN. It will be
available for download on HMRC’s website alongside the existing
disclosure forms.
13. The legislation will require clients who receive a SRN to pass it on to any
other person who is party to the same scheme and is likely to obtain a tax
advantage from using it.
14. The legislation will also provide for HMRC to withdraw a SRN, thereby
removing the obligation for the SRN to be passed on to other parties or
reported to HMRC.
15. Draft regulations, guidance and an updated Impact Assessment will be

published before this legislation is considered in detail by Parliament.
Further advice
16. If you have any questions about these changes please contact Philippa
Staples on 020 7147 2444 (email: philippa.staples@hmrc.gsi.gov.uk).

BN68
INCOME TAX EXEMPTIONS FOR THE RETURN TO WORK

CREDIT, IN-WORK CREDIT, IN-WORK EMERGENCY
DISCRETION FUND AND IN-WORK EMERGENCY FUND
1. Recipients of payments made under the Return to Work Credit, the

In-work Credit, the In-work Emergency Discretion Fund (in Great Britain)
and the In-work Emergency Fund (in Northern Ireland) schemes.
2. Legislation will be introduced in Finance Bill 2008 to exempt from income

tax, payments made under the following schemes, on and after
6 April 2008:
• Return to Work Credit;
• In-work Credit;
• In-work Emergency Discretion Fund; and
• In-work Emergency Fund.
3. Secondary legislation will be laid to introduce disregards for National

Insurance Contributions (NICs) for these schemes.
4. The Return to Work and In-work Credit schemes have been run as pilot
schemes by the Department for Work and Pensions (DWP) in Great
Britain and the Department for Employment and Learning (DEL) in
Northern Ireland. The pilot schemes have been in place since
1 October 2003 and 6 April 2004, respectively.
Operative date
5. The exemptions and disregards will have effect for payments made on and
after 6 April 2008.
6. Individuals are taxed on their earnings. Payments of Return to Work

Credit, In-work Credit, In-work Emergency Discretion Fund and In-work
Emergency Fund comprise earnings for the purposes of income tax within
the meaning of section 62 of the Income Tax (Earnings and Pensions) Act
2003 (ITEPA) and section 3(1) Social Security Contributions and Benefits
Act 1992 for the purposes of NICs.

7. When the pilot schemes were launched, HM Treasury used their powers
under section 151 of the Finance Act 1996 to exempt the current Return to
Work Credit and In-work Credit pilot schemes from income tax. These
exemptions only have effect for payments made under pilot schemes and
so cannot have effect for payments made under the national schemes.
8. Section 677(1) of ITEPA includes, in Table B, the list of United Kingdom

benefits which are exempt from income tax. Including the Return to Work
Credit, In-work Credit, In-work Emergency Discretion Fund and In-work
Emergency Fund in Table B will mean that payments made under the
national schemes will be free from income tax.
9. Amendments will be made separately to the Social Security

(Contributions) Regulations 2001 to disregard In-work Emergency
Discretion Fund and In-work Emergency Fund payments for NICs.
10. Information about these schemes will be available on the DWP website at
www.dwp.gov.uk and the DEL website at www.delni.gov.uk
Further advice
11. If you have any questions about the tax change, please contact Paul
Thomas 020 7147 2479 (email: paul.thomas@hmrc.gsi.gov.uk).

BN69
COMPANY CAR BENEFIT TAX
1. Employees provided with a car that is available for their private use, and
employers who pay Class 1A National Insurance contributions on the
taxable benefit of a company provided car.
2. Legislation will be introduced in Finance Bill 2008 to set the rates of

company car tax charge for 2010-11 and subsequent years.
Operative date
3. This measure will have effect on and after 6 April 2010.
4. Where a car is made available for an employee’s private use, a taxable

benefit arises under sections 114 and 120 of the Income Tax (Earnings
and Pensions) Act 2003 (ITEPA).
5. Company car tax is calculated by applying a percentage to the list price of

the car. The percentage is related to the CO2 emissions of the car and
ranges from 15 per cent to 35 per cent in 1 per cent increments for a petrol
car. Most diesel cars attract a 3 per cent supplement on petrol
percentages (also capped at 35 per cent). A new lower rate of 10 per cent
for cars with CO2 emissions of exactly 120 grams per kilometre or less
(13 per cent for most diesels) will have effect on and after 6 April 2008.
6. The CO2 emissions figure which determines the 15 per cent rate for petrol
cars (the lower threshold) has been set as follows:
• 2008-09: 135 grams per kilometre of CO2; and
• 2009-10: 135 grams per kilometre of CO2.
7. From 2010-11 the lower threshold will be reduced by 5g/km to 130 g/km.
Further advice
8. If you have any questions about this change, please contact the Employer
Helpline on 0845 7143 143 or your local HMRC office. Information about
www.hmrc.gov.uk

BN70
EMPLOYER PROVIDED VANS: FUEL BENEFIT RULES
1. Employees provided with a company van available for their private use,
who purchase fuel for business travel which is then reimbursed or
otherwise paid for by their employer. Employers who bear Class 1A
National Insurance on the taxable benefit of providing a van and the fuel
for it purchased by the employee.
2. Legislation will be introduced in Finance Bill 2008 to ensure that

reimbursement of private fuel cost is not treated as earnings for tax
purposes and that the same rules have effect for the provision of van fuel
for private use as those that currently have effect for company car fuel.
Operative date
4. Section 239(3) of the Income Tax (Earnings and Pensions) Act 2003
(ITEPA) signposts that section 239(1) and (2) of ITEPA do not prevent a
charge to tax arising under section 149 of ITEPA in relation to company
car fuel benefit. To ensure consistency the amendment expands the
signpost to cover van fuel benefit (section 160 of ITEPA).
5. A further minor change to section 269 of ITEPA will ensure that the
signposting provided by the section covers van fuel as well as car fuel.
Further advice
6. If you have any questions about this change, please contact Elizabeth
O’Donnell on 020 7147 2502, email: elizabeth.j.o’donnell@hmrc.gsi.gov.uk

BN71
HYDROCARBON OILS: DUTY RATES CHANGES AND RATES

SIMPLIFICATION
1. Businesses producing and importing hydrocarbon oils and alternative fuel

products.
2. Legislation will be introduced in Finance Bills 2008, 2009 and 2010 to

amend the duty rates for hydrocarbon oils and reduce the number of rates
for heavy oils and light oils.
Operative date
3. The simplification changes and the introduction of a rebated rate for

biodiesel and bioblend will have effect on and after 1 April 2008. The 2008
rates changes will have effect on and after 1 October 2008. The 2009
changes will have effect on and after 1 April 2009. The 2010 changes will
have effect on and after 1 April 2010.
4. On and after 1 April 2008, the three existing duty rates for heavy oil
(diesel) will be reduced to one (heavy oil). On and after 1 October 2008,
this rate will increase by 2 pence per litre. On and after 1 April 2009, this
rate will be further increased by 1.84 ppl, and on and after 1 April 2010, by
0.5ppl above indexation in that year.
Duty rate per litre (£)

Heavy oil Current On and On and On and
after 1 after 1 after 1
April October April
2008 2008 2009
Heavy oil which is not Ultra 0.5694 0.5035 0.5235 0.5419
low sulphur diesel (ULSD)
or Sulphur-free diesel (SFD),
i.e. conventional diesel
ULSD 0.5035
SFD 0.5035

5. On and after 1 April 2008, the four existing duty rates for light oil (petrol)
will be reduced to two (unleaded petrol and leaded petrol). On and after 1
October 2008, the unleaded petrol rate will increase by 2 pence per litre.
On and after 1 April 2009, it will be further increased by 1.84 ppl, and on
and after 1 April 2010 by 0.5ppl above indexation in that year.
Unleaded Current Duty rate per Duty rate per Duty rate
petrol rate per litre (£) on litre (£) on per litre
litre (£) and after 1 and after 1 (£) on and
April 2008 October 2008 after 1
April 2009
Unleaded 0.5365 0.5035 0.5235 0.5419

petrol
(that is not
Ultra low
sulphur
petrol
(ULSP) or
Sulphur-free
petrol (SFP))
ULSP 0.5035
SFP 0.5035
6. On and after 1 October 2008, the duty rate for leaded petrol will increase
by 2 ppl.
Leaded petrol Current rate per litre Duty rate per litre (£)
(£) on and after 1
October 2008
Light oil (other than 0.6007 0.6207
unleaded petrol)
7. The duty rate for aviation gasoline (AVGAS) is half that of the light oil
(other than unleaded petrol) rate. On and after 1 November 2008 a new
fiscal definition of AVGAS will be introduced and the rate will be made
freestanding at the 1 October level.
Current duty rate per Duty rate per litre (£)

litre (£) from 1 October 2008
AVGAS 0.3003 0.3103
8. On and after 1 October 2008, on and after 1 April 2009 and on and after 1
April 2010, effective rates of duty (that is, the relevant duty minus the
relevant rebate) for non-road fuels will be increased by the same
percentage as main road fuels.

Rebated oils Current Effective duty Effective duty
effective duty rate per litre (£) rate per litre (£)
rate per litre (£) on and after 1 on and after 1
October 2008 April 2009
Light oil 0.0929 0.0966 0.1000

delivered to an
approved person
for use as
furnace fuel
Marked gas oil 0.0969 0.1007 0.1042
Fuel oil 0.0929 0.0966 0.1000
Kerosene to be 0.0969 0.1007 0.1042

used as motor
fuel off-road or in
an excepted
vehicle
9. The current duty differential of 20 ppl for biofuels for road use will cease
from 2010 and duty will thereafter be charged at the same rate as main
road fuels.
Biofuels Current duty Duty rate per Duty rate per

rate per litre (£) litre (£) on and litre (£) on and
after 1 October after 1 April
2008 2009
Biodiesel 0.3035 0.3235 0.3419
Bioethanol 0.3035 0.3235 0.3419
10. On and after 1 April 2008, a new rebated rate of duty will be introduced on
biodiesel and bioblend used other than as fuel for road vehicles. On and
after 1 October 2008, this rate will be increased by the same percentage
as main road fuels. The existing repayment mechanism in relation to the
use of unblended biodiesel in off-road applications will come to an end. In
the case of bioblend produced with kerosene for heating use, a nil rate of
duty will have effect.

Rebated Current effective Effective duty Effective duty
biodiesel and duty rate per rate per litre (£) rate per litre (£)
bioblend litre (£) on and after 1 on and after 1
April 2008 October 2008
Biodiesel for 0.0313 0.0969 0.1007
non-road use
Biodiesel 0.5694 0.0969 0.1007

blended with
gas oil
Biodiesel 0.5694 Nil Nil

blended with
kerosene
11. The duty rate for natural gas will increase to maintain the differential with
main road fuels in pence per litre equivalents up to 2010-11. The duty rate
for liquefied petroleum gas will increase to reduce the differential with main
road fuels by the equivalent of 1 penny on litre of petrol up to 2010-11, in
line with the alternative fuels framework.
Road fuel gases Current Duty rate per kg Duty rate per kg
effective rate (£) on and after (£) on and after
per kg (£) 1 October 2008 1 April 2009
Natural gas 0.1370 0.1660 0.1926

(NG), including
biogas
Road fuel gas 0.1649 0.2077 0.2482

other than
natural gas – eg
liquefied
petroleum gas
(LPG)
12. The duty differential applicable to biogas, equivalent to 40.88 pence on a

litre of petrol, will remain at least at its current level until Budget 2012.
13. The Hydrocarbon Oil Duties Act 1979 will be amended by Finance Bill
2008 to implement those changes to have effect on and after 1 April 2008.
Further advice

BN72
NEW AVIATION DUTY REPLACING AIR PASSENGER DUTY

(APD)
1. No individuals or businesses will be affected by this measure.
2. Legislation will be introduced in Finance Bill 2008 to enable HM Revenue

& Customs (HMRC) to proceed with the development of the new duty on
aviation before its formal introduction in November 2009, when it will
replace air passenger duty.
Operative date
3. The measure will have effect on and after the date that Finance Bill 2008
4. In the 2007 Pre-Budget Report, the Government announced its intention to

replace air passenger duty with a duty on aviation payable per plane. This
proposed aviation duty is a new tax and as such is not currently a function
of HMRC.
5. Until the main primary legislation introducing aviation duty becomes law,
expected to be in Finance Act 2009, it remains outside the scope of
HMRC’s responsibility and consequently expenditure related to its
development is restricted.
6. Paving legislation will be introduced in Finance Bill 2008 to allow HMRC to

incur expenditure on the development of the new aviation duty.
Further advice

BN73
VAT: INCREASED TURNOVER THRESHOLDS FOR

REGISTRATION AND DEREGISTRATION
1. Businesses whose taxable turnover is close to the current VAT thresholds

for registration and deregistration.
2. The measure increases the taxable turnover threshold which determines

whether a person must be registered for VAT from £64,000 to £67,000.
3. The taxable turnover threshold which determines whether a person may

apply for deregistration will be increased from £62,000 to £65,000. The
existing conditions for determining entitlement or liability to deregistration
remain unchanged.
4. The registration and deregistration threshold for relevant acquisitions from

other European Union Member States will also be increased from £64,000
to £67,000.
Operative date
5. The new registration and deregistration thresholds will have effect on and
after 1 April 2008.
6. The increase in the taxable turnover threshold means that a person will
have to apply for registration if:
• at the end of any month, the value of the taxable supplies made in the
past 12 months or less has exceeded £67,000; or
• at any time there are reasonable grounds for believing that the value of
the taxable supplies to be made in the next 30 days alone will exceed
£67,000.

7. If at the end of any month, a person’s taxable turnover in the past
12 months or less exceeds £67,000 but HM Revenue & Customs is
satisfied that it will not exceed £65,000 in the next 12 months, that person
will not have to be registered.
8. Schedules 1 and 3 to the Value Added Tax Act 1994 will be amended by
statutory instrument to give effect to these changes.
Further advice

BN74
VAT: AMENDMENT TO THE EXEMPTION FOR FUND

MANAGEMENT
1. Fund managers and providers of fund administration services.
2. This measure will extend the VAT exemption for fund management to
cover UK-listed investment entities (including investment trust companies
and venture capital trusts) and certain overseas funds.
Operative date
3. The measure will have effect for supplies of services made on or after 1
October 2008.
4. Items 9 and 10, of Group 5 of Schedule 9 to the VAT Act 1994 exempt the
management of authorised unit trusts, trust based schemes and open-
ended investment companies.
5. This exemption will be amended by secondary legislation to be laid before

Parliament around the beginning of June 2008.
6. The funds defined for the exemption will be amended as follows:

• trust-based schemes will be deleted;
• closed-ended investment entities, which invest in securities and whose
shares are included in the UK Listing Authority main Official List, will be
added; and
• funds established outside the UK, which are recognised overseas
schemes under sections 264, 270 and 272 of the Financial Services &
Markets Act 2000, will be added.
7. Draft legislation and guidance will be published on the HM Revenue &

Customs website in April 2008.
Further advice
8. If you have any questions about this change, please contact Ted
Castledine on 020 7147 0177 (e-mail: ted.castledine@hmrc.gsi.gov.uk).

BN75
INDIRECT TAX RETURNS: CORRECTION OF ERRORS
1. Businesses registered for Value Added Tax (VAT), insurance premium tax
(IPT), air passenger duty (APD), landfill tax (LFT), climate change levy
(CCL) and aggregates levy (AGL).
2. This measure will increase the limit below which errors on previous returns
may be corrected on the return for the period in which the errors are
discovered.
Operative date
3. This measure will have effect for accounting periods commencing on or

after 1 July 2008.
4. The error correction regulations for VAT, IPT, APD, LFT, CCL and AGL
permit the inclusion of errors below £2,000 on the next return submitted.
Errors exceeding £2,000 have to be separately notified to HM Revenue &
Customs (HMRC).
5. Regulation 34(3) of the VAT Regulations 1995 (SI 1995/2518) permits the
taxable person to correct their VAT account during the accounting period
in which the error is discovered, provided the net errors discovered do not
exceed £2,000.
6. Schedule 3 of the Air Passenger Duty Regulations 1994 (SI 1994/1738)

reproduces the return form APD2. Box 7 of that form provides for entry on
the return of underdeclarations from previous periods, provided they do
not exceed £2000. Box 8 of that form provides for overdeclarations from
previous periods, with no limit.
7. Regulation 13(3) of the Insurance Premium Tax Regulations 1994

(SI 1994/1774) provides that, where the registrable person discovers
underdeclarations or overdeclarations in an accounting period, they may
be entered on the return for that accounting period, provided they do not
exceed £2,000.

8. Regulation 13(4) of the Landfill Tax Regulations 1996 (SI 1996/1527)
provides that, where a taxable person discovers underdeclarations they
may be entered on the return for the accounting period in which they were
discovered, provided that they do not exceed £2,000.
9. Regulation 28(2),(3) and (4) of the Climate Change Levy (General)

Regulations 2001 (SI 2001/838) provide that, where a registrable person
discovers a return previously made is based on an under-calculation or an
over-calculation, they must correct the error on the return for the
accounting period in which it was discovered, provided that it does not
exceed £2,000.
10. Regulation 29(2), (3) and (6) of the Aggregates Levy (General)
Regulations 2002 (SI 2002/761) provide that, where a registrable person
discovers a return previously made is based on an under-calculation or an
over-calculation, they must correct the error on the return for the
accounting period in which it was discovered, provided the total net
amount does not exceed £2,000.
11. This measure increases the de minimis £2,000 limit to the greater of
£10,000 or 1 per cent of turnover, subject to an upper limit of £50,000 for
VAT, IPT, LFT, CCL and AGL. For VAT, LFT, CCL and AGL errors above
£10,000, the limit for correcting errors on the next return will be calculated
by reference to net VAT turnover (Box 6 on VAT return) for the return
period. For IPT, this limit will be calculated by reference to the net IPT
turnover (Box 10 on IPT return). APD procedures will be amended to
increase the de minimis limit to the greater of £10,000 or 1 per cent of duty
due, before adjustments for errors from previous periods, subject to an
upper limit of £50,000. For LFT, CCL and AGL taxpayers who are not
required to be registered for VAT a single limit of £10,000 will have effect.
12. These regulations will be amended by statutory instrument to effect the

changes to the voluntary disclosure limit.
Further advice
13. If you have any questions about this change, please contact HMRC
National Advice Service on 0845 010 9000. Information about Budget
www.hmrc.gov.uk

BN76
VAT: CHANGES IN FUEL SCALE CHARGES
1. Businesses which recover input tax on fuel used for private motoring.
2. This measure will amend the VAT scale charges for taxing private use of
road fuel, to reflect changes in fuel prices. It will also amend the table of
CO2 bands to maintain alignment with those used for direct tax purposes.
Operative date
3. The scale charges will be amended by secondary legislation which will

come into force on 1 May 2008. Businesses must use the new scale
charges from the start of their next prescribed accounting period beginning
on or after 1 May 2008.
4. The scale charges are set out in Table A in Section 57(3) of the Value
Added Tax Act 1994. Secondary legislation will be laid before Parliament
in March to replace the current table with a new table to reflect the
changes to the scale charges.
5. The table below shows the revised scale charges and output tax payable
in each accounting period, depending whether it is a 12 month, 3 month or
1 month accounting period.
6. VAT fuel scale charges for 12 month periods:
VAT fuel scale

charge, 12 month VAT on 12 month VAT exclusive 12
CO2 band, g/km period, £ charge, £ month charge, £
120 or less 555.00 82.66 472.34
125 830.00 123.62 706.38
130 830.00 123.62 706.38
135 830.00 123.62 706.38
140 885.00 131.81 753.19
145 940.00 140.00 800.00
150 995.00 148.19 846.81
155 1,050.00 156.38 893.62
160 1,105.00 164.57 940.43
165 1,160.00 172.77 987.23
170 1,215.00 180.96 1,034.04
175 1,270.00 189.15 1,080.85
180 1,325.00 197.34 1,127.66
185 1,380.00 205.53 1,174.47

190 1,435.00 213.72 1,221.28
195 1,490.00 221.91 1,268.09
200 1,545.00 230.11 1,314.89
205 1,605.00 239.04 1,365.96
210 1,660.00 247.23 1,412.77
215 1,715.00 255.43 1,459.57
220 1,770.00 263.62 1,506.38
225 1,825.00 271.81 1,553.19
230 1,880.00 280.00 1,600.00
235 or more 1,935.00 288.19 1,646.81
VAT fuel scale

charge, 3 month VAT on 3 month VAT exclusive 3
CO2 band, g/km period, £ charge, £ month charge, £
120 or less 138.00 20.55 117.45
125 207.00 30.83 176.17
130 207.00 30.83 176.17
135 207.00 30.83 176.17
140 221.00 32.91 188.09
145 234.00 34.85 199.15
150 248.00 36.94 211.06
155 262.00 39.02 222.98
160 276.00 41.11 234.89
165 290.00 43.19 246.81
170 303.00 45.13 257.87
175 317.00 47.21 269.79
180 331.00 49.30 281.70
185 345.00 51.38 293.62
190 359.00 53.47 305.53
195 373.00 55.55 317.45
200 386.00 57.49 328.51
205 400.00 59.57 340.43
210 414.00 61.66 352.34
215 428.00 63.74 364.26
220 442.00 65.83 376.17
225 455.00 67.77 387.23
230 469.00 69.85 399.15
235 or more 483.00 71.94 411.06
CO2 band, g/km VAT fuel scale VAT on 1 month VAT exclusive 1
120 or less 46.00 6.85 39.15
125 69.00 10.28 58.72
130 69.00 10.28 58.72
135 69.00 10.28 58.72
140 73.00 10.87 62.13
145 78.00 11.62 66.38
150 82.00 12.21 69.79
155 87.00 12.96 74.04
160 92.00 13.70 78.30
165 96.00 14.30 81.70
170 101.00 15.04 85.96
175 105.00 15.64 89.36
180 110.00 16.38 93.62
185 115.00 17.13 97.87

185 115.00 17.13 97.87
190 119.00 17.72 101.28
195 124.00 18.47 105.53
200 128.00 19.06 108.94
205 133.00 19.81 113.19
210 138.00 20.55 117.45
215 142.00 21.15 120.85
220 147.00 21.89 125.11
225 151.00 22.49 128.51
230 156.00 23.23 132.77
235 or more 161.00 23.98 137.02
9. The scale charge for a particular vehicle is determined by its CO2

emissions figure. Where the CO2 emissions figure of a vehicle is not a
multiple of five, the figure is rounded down to the next multiple of five to
determine the level of charge. For a bi-fuel vehicle which has two CO2
emissions figures, the lower of the two figures should be used. For cars
which are too old to have a CO2 emissions figure HM Revenue & Customs
(HMRC) have prescribed a level of emissions by reference to the vehicle’s
engine capacity (cc).
10. An update to Notice 700/64 VAT: Motoring Expenses, including the

revised figures for all categories of vehicle, will be available from the
National Advice Service in due course.
Further advice

BN77
VAT: REDUCED RATE FOR SMOKING CESSATION

PRODUCTS
1. Suppliers and consumers of smoking cessation products.
2. Secondary legislation will be introduced to ensure that the reduced Value

Added Tax (VAT) rate of 5 per cent for ‘over the counter’ sales of
pharmaceutical smoking cessation products will continue to have effect.
3. Smoking cessation products that are dispensed on a prescription will

remain zero-rated.
Operative date
4. This measure will have effect on and after 1 July 2008.
5. Smoking cessation products dispensed by a pharmacist on the basis of a

prescription of a medical practitioner are already zero-rated by the VAT
Act 1994. This measure will not affect smoking cessation products
supplied in these circumstances.
6. The reduced rate of 5 per cent has effect for all other supplies of
pharmaceutical smoking cessation products, including supplies made over
the internet. This includes all non-prescribed sales of patches, gums,
inhalators and other pharmaceutical products held out for sale for the
primary purpose of helping people to quit smoking.
7. To coincide with the smoking ban in England, the VAT (Reduced Rate)
Order 2007 (SI 2007/1601) introduced Group 11 of Schedule 7A to the
Value Added Tax Act 1994. The Order specified that this reduced rate was
to have effect in relation to supplies of smoking cessation products made
on or after 1 July 2007 but before 1 July 2008. Secondary legislation will
be laid before Parliament to extend the reduced rate beyond
30 June 2008.
Further advice

BN78
VAT: TRANSITIONAL PERIOD FOR CLAIMS
1. Businesses registered for VAT between 1 April 1973 and 1 May 1997 who
either declared more output VAT than they were liable for, or claimed less
input VAT than entitled to.
2. Legislation will be introduced in Finance Bill 2008 to provide a transitional

period to 31 March 2009, during which eligible businesses can make VAT
claims for rights that accrued before the introduction in 1996 and 1997 of
the three-year time limit for claims.
3. The legislation will also correspondingly amend the powers of assessment

of HM Revenue & Customs (HMRC) to ensure that assessments may be
made to recover any amounts paid, which are subsequently found to have
been incorrectly claimed by business.
Operative date
4. The transitional period will run to 31 March 2009.
Regulation 29(1A) of the Value Added Tax Regulations 1995
5. Regulation 29(1A) provides that no claim for input tax can be made more
than three years after the due date of the return, for the accounting period
in which the input tax was incurred.
6. In January 2008, the House of Lords held in its judgments in Michael

Fleming (trading as Bodycraft) and Condé Nast Publications Ltd that,
because there was no transitional period when the three-year cap was first
introduced, the three-year time limit does not have effect for any right to
claim input tax that accrued before it was enacted on 1 May 1997 until an
adequate transitional period has been provided.
7. This measure will give effect to the judgment of the House of Lords by
providing a transitional period during which claims for input tax can be
made, for accounting periods ending between 1 April 1973 and 1 May
1997, before they become subject to the three-year time limit.

Section 80(4) of the Value Added Tax Act 1994
8. Section 80 provides that where a person accounts for more output VAT
than is due, they can claim it back from HMRC. Section 80(4) provides that
HMRC are not liable to pay any claim made more than three years after
the end of the accounting period to which it relates.
9. HMRC considers that the House of Lords’ judgments in Michael Fleming

(trading as Bodycraft) and Condé Nast Publications Ltd also apply to rights
to claim overpaid output tax that accrued before the three-year time limit
was enacted on 4 December 1996 until an adequate transitional period
has been provided.
10. This measure will provide a transitional period during which claims for
overdeclared output tax can be made, for accounting periods ending
between 1 April 1973 and 4 December 1996, before they become subject
to the three-year time limit.
Section 80(4A) of the Value Added Tax Act 1994
11. Assessments to recover amounts incorrectly paid by HMRC to businesses

who claim under section 80 must be made within two years of HMRC
having acquired evidence of facts, sufficient to justify the making of the
assessment.
12. This measure will add a two-year time limit from the end of the accounting
period in which an erroneous payment is made. This will ensure that
HMRC are able recover amounts paid out where it is later discovered
repayment was mistaken.
13. This will also bring these assessment time limits into line with those for
HMRC’s other VAT assessment powers.
Section 73(2) of the Value Added Tax Act 1994
14. Assessments to recover amounts incorrectly paid by HMRC to businesses

on input tax claims must be made within two years of the end of the
accounting period in which the claim is made.
15. This measure will amend the time limit, so that it runs from the end of the
accounting period in which the claim was paid, ensuring that HMRC will be
able to recover any amounts incorrectly paid.
Further advice
16. If you have any questions about this change, please contact Pauline
Walsh on 0113 389 4432 (e-mail: pauline.walsh3@hmrc.gsi.gov.uk).

BN79
VAT: OPTION TO TAX LAND & BUILDINGS
1. Anyone who makes supplies of land and / or buildings.
2. This measure will simplify the legislation relating to the option to tax land
and/or buildings. It will also introduce minor changes to enable taxpayers
to revoke an option to tax after 20 years and make a number of associated
changes to improve practical administration of the option to tax.
Operative date
3. The rewritten legislation will have effect on and after 1 June 2008. The
earliest date an option to tax will be revocable will be 1 August 2009.
4. The law relating to the option to tax land and buildings for VAT is
contained in Schedule 10 to the VAT Act 1994.
5. A Treasury Order will be laid after Budget 2008 to insert a revised

Schedule 10 into the VAT Act and make certain consequential changes to
other VAT legislation, including new appeal rights. This will be
accompanied by a public notice having the force of law.
6. A number of associated changes to improve practical administration of the

option to tax and its revocation will be included in the legislation. These
deal with:
• opted properties held in a VAT group;
• opted buildings acquired for use as dwellings or relevant residential
purpose and bare land acquired for construction of building for such
purposes;
• the introduction of a new option to simplify the option to tax process for
taxpayers with a number of properties;
• early revocation of an option to tax within a “cooling-off” period;
• the automatic lapse of an option to tax six years after the taxpayer
ceased to have any interest in a property that they had previously
opted to tax;
• the ability, in certain circumstances, to exclude a new building from a
previous option to tax; and
• late applications for permission to opt to tax.

Further advice
7. If you have any questions about this change, please contact James
Ormanczyk on 020 7147 0484 (email james.ormanczyk@hmrc.gsi.gov.uk).
Further guidance and information will be published when the Treasury
Order is laid. Information about Budget measures is available on the HM

BN80
LANDFILL TAX: EXEMPTION FOR WASTE FROM CLEANING

UP CONTAMINATED LAND
1. Landfill site operators and those disposing of waste cleared from

contaminated land by landfill.
2. Waste from cleaning up contaminated land disposed of by landfill is

exempt from landfill tax. Secondary legislation to be laid later this year will
phase out this exemption.
3. In order to qualify for exemption, disposers must apply for and obtain a
relief certificate from HM Revenue & Customs (HMRC) before disposing of
their waste. This measure sets the deadline for the receipt of applications
for exemption under the scheme and the date from which the exemption
will be removed.
Operative date
4. Applications for landfill tax exemption certificates will not be accepted by

HMRC on or after 1 December 2008.
5. Anyone in possession of a valid exemption certificate will have until 31

March 2012 to dispose of their waste if they wish to benefit from the
exemption. All certificates issued under the scheme will cease to be valid
on or after 1 April 2012 and disposals to landfill of waste from cleaning up
contaminated land made on or after that date will be liable to landfill tax at
the appropriate rate.
6. Section 43B(1) of the Finance Act (FA) 1996 sets out the conditions that
must be satisfied in order for relief certificates to be issued. This
subsection will be amended to preclude the acceptance of applications
received on or after 1 December 2008.
7. The eligibility criteria for exemption are set out at section 43A of FA 1996.
Sections 43A and 43B FA 1996 will be repealed with effect on and after
1 April 2012.
8. These changes, and a number of consequential changes to FA 1996, will

be made by Treasury Order laid under the affirmative procedure later this
year.

9. Notice LFT2 “Reclamation of contaminated land” explains how to apply for
a relief certificate. The notice and application form can be found on the
HMRC website.
10. HMRC will write to landfill site operators and other interested businesses
to provide more details about these changes. The secondary legislation
needed to enact these changes will be published in draft in Summer 2008.
Further advice

BN81
LANDFILL COMMUNITIES FUND
1. Businesses registered for landfill tax and environmental bodies enrolled

under the Landfill Communities Fund (LCF).
2. Secondary legislation will be introduced to amend the maximum credit that

landfill site operators may claim against their annual landfill tax liability, for
contributions made to bodies with objects concerned with the environment,
enrolled under the LCF, from 6.6 per cent to 6 per cent. This should result
in an increase to the maximum value of the fund of £5 million to give a
potential value of £70 million of credit claimable for 2008-09.
3. Legislation will be introduced in Finance Bill 2008 to transfer responsibility

for decisions on whether to revoke the approval of an environmental body
which fails to comply with its obligations from ENTRUST, the regulatory
body, to the Commissioners of HM Revenue & Customs. These decisions
by the Commissioners will be subject to their review and appeals system.
4. The period after which an environmental body must submit details of its
income, expenditure and balances to the regulator, or the Commissioners
if appropriate, will be extended from 14 to 28 days after either the end of
the relevant period or a request being made. The relevant period is usually
a 12 month period from 1 April to 31 March each year.
Operative date
5. The measure will have effect on and after 1 April 2008.
6. A statutory instrument will be laid on 19 March 2008 to amend the

maximum percentage claimable under the LCF set out in regulation 31(3)
of the Landfill Tax Regulations 1996 (“the regulations”).
7. Legislation will be included in Finance Bill 2008 to amend paragraph

53(4)(d) of the Finance Act 1996 to enable the withdrawal of the approval
of an environmental body to be made by the Commissioners or the
regulatory body. By statutory instrument to be laid on 19 March 2008, the
regulations will be amended to transfer the power to revoke an
environmental body that fails to comply with its obligations set out in
regulation 33A(1) from the regulatory body to the Commissioners. The
instrument will omit regulation 34(1)(e) of the regulations to remove the

power from the regulatory body and insert a new paragraph in regulation
35 to confer the power on the Commissioners.
8. Legislation will be included in Finance Bill 2008 to insert a new paragraph

in section 54(1) of the Finance Act 1996 to include a decision by the
Commissioners to revoke the approval of an environmental body that fails
to comply with the requirements of regulation 33A(1) of the regulations in
the list of decisions that may be reviewed by the Commissioners. The
review decision will be subject to appeal by virtue of section 55 of the
Finance Act 1996.
9. A statutory instrument to be laid on 19 March 2008 will amend regulation

33A of the regulations to extend the period of time an environmental body
has for submitting financial details to the regulator, or the Commissioners if
appropriate, under paragraphs (1)(h), (ha) and (hb).
10. Information on the LCF is available from ENTRUST at www.entrust.org.uk
Further advice

BN82
LANDFILL TAX: STANDARD RATE
1. Businesses registered for landfill tax.
2. Legislation will be included in Finance Bill 2008 to increase the standard

rate of landfill tax by £8 per tonne to £40 per tonne.
Operative date
3. The new £40 per tonne rate will have effect for any standard rated
disposal of waste made, or treated as made, on or after 1 April 2009.
4. Section 42 of the Finance Act (FA) 1996 specifies the rates of landfill tax,
and will be amended to reflect the new standard rate.
5. The standard rate is currently £24 per tonne but this will increase to £32
per tonne from 1 April 2008 as a result of a change made by FA 2007.
Further advice

BN83
AGGREGATES LEVY: RATE
1. Those commercially exploiting taxable aggregate in the UK.
2. Legislation will be introduced in Finance Bill 2008 to increase the rate of

aggregates levy from £1.95 per tonne to £2.00 per tonne.
Operative date
3. The new rate will have effect for any aggregate commercially exploited on
or after 1 April 2009.
4. Section 16(4) of the Finance Act 2001 specifies the rate of aggregates
levy. This will be amended by Finance Bill 2008.
5. In Northern Ireland, registered operators in possession of a valid

aggregates levy credit certificate will continue to be entitled to 80 per cent
relief of the full levy rate. As a result of the rate increase, in effect, the
amount of levy payable by such operators will increase from 39 to 40
pence per tonne.
Further advice

BN84
CLIMATE CHANGE LEVY: RATES
1. Suppliers and others liable to account for the climate change levy.
2. Legislation will be introduced in Finance Bill 2008 to increase the rates of

climate change levy for 2009-10, broadly in line with inflation. The rates
will be:
Taxable commodity Rates

Electricity £0.00470
Gas supplied by a gas utility or any £0.00164
gas supplied in a gaseous state that
is of a kind supplied by a gas utility
Any petroleum gas, or other £0.01050
gaseous hydrocarbon, supplied in a
liquid state
Any other taxable commodity £0.01281
Operative date
3. The new rates shown in paragraph 2 above will have effect for supplies of
taxable commodities treated as taking place on or after 1 April 2009.
4. Paragraph 42(1) of Schedule 6 to the Finance Act 2000 contains the rates
of climate change levy. Finance Act 2007 amended paragraph 42 to
provide for the new rates on and after 1 April 2008. These rates from
1 April 2008, which were increased broadly in line with inflation, will be:
Taxable commodity Rates

Electricity £0.00456 per kilowatt hour
Gas supplied by a gas utility or any £0.00159 per kilowatt hour
gas supplied in a gaseous state that
is of a kind supplied by a gas utility
Any petroleum gas, or other £0.01018 per kilogram
gaseous hydrocarbon, supplied in a
liquid state
Any other taxable commodity £0.01242 per kilogram
5. Paragraph 42(1) of Schedule 6 to FA 2000 will be amended again to

provide for the rates that will have effect on and after 1 April 2009.

Further advice

BN85
CLIMATE CHANGE LEVY (CCL): ELECTRICITY FROM COAL

MINE METHANE
1. Electricity generators and suppliers.
2. Legislation will be introduced in Finance Bill 2008 to remove coal mine

methane from the list of sources of electricity regarded as renewable for
CCL purposes. Electricity generated from most renewable sources is
eligible for the CCL exemption scheme for such electricity. The impact of
this change is that electricity generated from coal mine methane will no
longer qualify for the CCL exemption scheme.
Operative date
3. The measure will have effect for electricity generated from coal mine
methane on or after 1 November 2008.
4. Paragraph 19(4A) of Schedule 6 to the Finance Act (FA) 2000 and

regulation 47(2A) of the Climate Change Levy (General) Regulations 2001
require coal mine methane to be regarded as a renewable source (rather
than a fossil fuel) for the purposes of the CCL exemption. Legislation will
be included in Finance Bill 2008 to provide for the removal of both
requirements. The legislation will also remove section 126 of FA 2002
(which inserted sub-paragraph (4A) (coal mine methane to be regarded as
renewable source) into FA 2000).
5. HM Revenue & Customs will write to electricity generators and suppliers,

and to the Gas and Electricity Markets Authority (Ofgem) and the Northern
Ireland Authority for Utility Regulation, regarding the details of the removal
of the exemption.
Further advice

BN86
CLIMATE CHANGE LEVY (CCL): CLIMATE CHANGE LEVY

ACCOUNTING DOCUMENTS (CCLADs): SIMPLIFICATION
1. Electricity and gas suppliers.
2. Legislation will be introduced in Finance Bill 2008 to remove the

requirement that, in order to count as a climate change levy accounting
document (CCLAD), an invoice issued by an electricity or gas supplier
must contain wording identifying it as a CCLAD.
Operative date
4. Supplies of electricity and gas are continuous. The point at which climate
change levy (CCL) should be accounted for on such supplies to
HM Revenue & Customs is generally determined by the issue of an
invoice (e.g., an energy bill). For CCL purposes, a bill relating to a supply
of electricity or gas must contain information relating to the supplier, the
customer, the date of issue, and the period and quantity of electricity or
gas covered. The bill must also say whether it is a CCLAD by including
on it the phrase “climate change levy accounting document”, “CCL
accounting document” or similar alternatives. As well as creating an
accounting document for CCL, the CCLAD can also be used as evidence
to support claims for bad debt relief by the energy supplier.
5. The removal of the requirement in paragraph 143(2)(a) of Schedule 6 to

the Finance Act 2000 to identify electricity and gas bills as CCLADs, for
them to count as such for CCL purposes, will have no effect on CCL
accounting or claims to bad debt relief, as the other information required
on the bill (described above in paragraph 4) will continue to be required
and will be sufficient for these purposes.
6. Suppliers of electricity and gas that wish to continue to identify their bills as
CCLADs can still opt to do so.

Further advice

BN87
ENERGY PRODUCTS DIRECTIVE: EXPIRY OF DEROGATIONS
1. Suppliers and users of:

• fuel for private pleasure-flying;
• fuel for private pleasure-boating; and
• waste oil as fuel, either directly after recovery or following a
recycling process for waste oils.
2. The UK’s derogations from the Energy Products Directive (EPD) which
permitted the use of reduced and exempt rates of duty on fuel used for the
purposes of private pleasure-flying, pleasure boating and on waste oils
re-used as fuel, expired on 31 December 2006 following a decision by the
European Commission. On and after 1 November 2008 fuel used for
these purposes will no longer benefit from the current reduced and exempt
rates of duty. The following changes will instead be introduced.
Pleasure-flying
3. Users of aviation turbine fuel (Avtur) for private pleasure-flying will be

liable for the payment of duty to HM Revenue & Customs (HMRC) on a
periodic basis. The duty rate will be 52.35 pence per litre. The supplier will
be obliged to draw the attention of the purchaser to end-use liability. The
purchaser will be required to make a declaration to the supplier if he
intends to use the fuel for pleasure flying.
4. A new fiscal definition of aviation gasoline (AVGAS) with a free-standing

duty rate will be introduced. The duty rate will be 31.03 pence per litre.
This will apply to both commercial and private pleasure use so there will
be no change to the current procedures.
Pleasure-boating
5. The use of red diesel will continue to be permitted for pleasure boating but
the supplier will be liable to account for and pay to HMRC an amount
equivalent to the rebate allowed on the fuel. HMRC will continue informal
discussions with stakeholders to consider an allowance for fuel used for
the purposes of heating and lighting.

Waste oils
6. Waste oil recoverers will be treated as oil producers. A positive rate of duty
equivalent to that for fuel oil, 9.66 pence per litre, will be introduced on
heavy oil, which encompasses waste oils but only if supplied as fuel.
Operative date
7. The changes will have effect on and after 1 November 2008.
8. Legislation will be introduced in Finance Bill 2008 to amend the

Hydrocarbon Oil Duties Act 1979 (HODA). New sections on heavy oil used
for heating and fuel used in aircraft and boats, and a new definition of
aviation gasoline in section 1, will be added.
9. Statutory instruments will be made under the relevant sections of HODA.
Further advice

BN88
AMUSEMENT MACHINE LICENCE DUTY (AMLD): GAMING

MACHINES
1. Anyone who provides a licensable gaming machine for play in the UK.
2. Increases the amount of Amusement Machine Licence Duty (AMLD) that

will be paid on licences for all categories of gaming machines.
Operative date
3. The new duty amount for all gaming machines will have effect for any
licence applications received at HM Revenue & Customs (HMRC)
Greenock accounting centre after 4pm on 14 March 2008.
4. The table in section 23 of the Betting and Gaming Duties Act 1981
(BGDA), setting out the amounts of licence duty, will be replaced by the
table below.
Months Category Category Category Category Category Category

A (£) B1 (£) B2 (£) B3 (£) B4 (£) C (£)
1 455 230 180 180 165 70
2 905 450 355 355 320 135
3 1355 675 535 535 485 200
4 1805 905 710 710 645 265
5 2260 1130 890 890 805 335
6 2710 1355 1065 1065 965 400
7 3160 1580 1245 1245 1125 465
8 3610 1805 1420 1420 1290 530
9 4065 2030 1600 1600 1450 600
10 4515 2260 1775 1775 1610 665
11 4965 2485 1955 1955 1770 730
12 5160 2580 2030 2030 1840 760

Applications for payment by instalment
5. Paragraph 7A of Schedule 4 to BGDA allows HMRC to make and publish

arrangements and conditions that apply to the ‘payment by instalments’
scheme. In accordance with that paragraph, and in addition to the
conditions published in part 6 of Notice 454 ‘Amusement Machine Licence
Duty’, on and after 12 March 2008 HMRC will not accept applications to
pay licence duty by instalments more than six weeks before the licence
start date. Notice 454 will be amended in due course.
6. Amended licence application forms L222, and L223 for payment by

instalment, are available on the HMRC website.
Further advice
7. If you have any questions about this change, please contact National
Advice Service on 0845 010 9000. Information about Budget measures
are available on the HM Revenue & Customs website at www.hmrc.gov.uk

BN89
GAMING DUTY: REVALORISATION OF DUTY BANDS
1. Casino operators.
2. The Gross Gaming Yield (GGY) bandings for each duty band will be
increased in line with inflation.
Operative date
3. The changes to the bandings come into effect for accounting periods
starting on or after 1 April 2008.
The first £1,911,000 of GGY 15 per cent
The next £1,317,000 of GGY 20 per cent
The remainder 50 per cent
4. The table of GGY bandings in section 11 of the Finance Act 1997 will be
replaced by the table above. As a consequence of this change, regulations
will be made to amend the table for interim payments on account in the
Gaming Duty Regulations 1997.
5. Excise Notice 453 (Gaming Duty) will be amended in due course.
Further advice

BN90
TOBACCO PRODUCTS DUTY: RATES
1. Manufacturers and importers of tobacco products (i.e. cigarettes, cigars, hand-

rolling tobacco, other smoking tobacco and chewing tobacco).
2. Legislation will be introduced in Finance Bill 2008 to increase the rates of duty
on tobacco products imported into, or manufactured in, the United Kingdom in
line with inflation.
Operative date
3. The rate changes will have effect on and after 6pm on 12 March 2008.
4. The new rates of duty are:

• cigarettes: An amount equal to 22 per cent of the retail price plus £112.07
per thousand cigarettes;
• cigars: £163.22 per kilogram;
• hand-rolling tobacco: £117.32 per kilogram;
• other smoking tobacco and chewing tobacco: £71.76 per kilogram.
5. An amendment will be made to the Table of rates of duty in Schedule 1 to the

Tobacco Products Duty Act 1979, as last substituted by section 6 of the
Finance Act 2007.
Further advice

BN91
ALCOHOL DUTY: RATES
1. Manufacturers, importers, distributors, retailers and consumers of alcohol

products (spirits, beer, cider, wine and made-wine).
2. Legislation will be introduced in Finance Bill 2008 to provide for the annual
setting of duty rates for alcohol. Duty rates will increase by 6 per cent in
real terms for all alcoholic drinks. The impact of the changes on retail
prices for typical alcoholic drinks is equivalent to:
• 55 pence on a 70cl bottle of spirits @ 37.5% abv;
• 4 pence on a pint of beer;
• 3 pence on a litre of still cider;
• 14 pence on a 75cl bottle of sparkling cider;
• 14 pence on a 75cl bottle of wine or made-wine; and
• 18 pence on a 75cl bottle of sparkling wine.
3. The Small Brewers Relief scheme will continue to provide 50 per cent duty
relief to the smallest brewers.
Operative date
4. These changes will have effect on and after 17 March 2008.
5. The Alcoholic Liquor Duties Act 1979 and the HM Revenue & Customs
Tariff will be amended to effect the changes.
Further advice

The alcohol duty rates will be as follows:
Type Rate
Rate £ per litre of pure alcohol
Spirits 21.35
Spirits-based Ready To Drinks 21.35
Wine and made-wine: Exceeding 21.35

22% abv
Rate £ per hectolitre per cent of

alcohol in the beer
Beer 14.96
Rate £ per hectolitre of product
Still cider and perry: Exceeding 1.2% 28.90

- not exceeding 7.5% abv.
Still cider and perry: Exceeding 7.5% 43.37

- less than 8.5% abv.
Sparkling cider and perry: 28.90

Exceeding 1.2% - not exceeding 5.5%
abv.
Sparkling cider and perry: 188.10

Exceeding 5.5% - less than 8.5% abv.

1.2% - not exceeding 4% abv
Wine and made-wine: Exceeding 4% 82.32

- not exceeding 5.5% abv.
Still wine and made-wine: Exceeding 194.28

5.5% - not exceeding 15% abv.

15% - not exceeding 22% abv.
Sparkling wine and made-wine: 188.10

Exceeding 5.5% - less than 8.5% abv.
Sparkling wine and made-wine: 248.85

8.5% and above -not exceeding 15% abv

BN92
CALCULATION OF ALCOHOL DUTY
1. Businesses that pay excise duty on alcoholic drinks (e.g. drinks

manufacturers and importers, and excise warehouse keepers).
2. Legislation will be introduced in Finance Bill 2008 to repeal the current

legal provision that allows HM Revenue & Customs (HMRC) to disregard
fractions of a penny in any amount of duty due. This is because, since the
half penny is no longer legal tender, this provision is superfluous.
3. In addition, HMRC will introduce a common method of calculating the

excise duty due on all categories of alcoholic drinks. The introduction of a
common method of calculation will remove the present inconsistencies in
the way excise duty is calculated on alcoholic drinks, which arise from the
different treatment of fractions within the calculation process. This
measure will clarify that, under the common method, any fractions of
amounts of volume or duty must not be disregarded during the duty
calculation.
4. The relevant HMRC notices will be updated accordingly.
Operative date
5. The repeal of the fraction disregard will have effect on and after the date
that Finance Bill 2008 receives Royal Assent. The common calculation
method will be introduced later in the year after further discussions with
the alcohol industry on timing.
6. Section 137(2) of the Customs and Excise Management Act 1979 (CEMA)
requires that where duty is chargeable on a volume of goods, the duty
must be calculated proportionately on any fraction of that volume of goods.
Section 137(3) of CEMA allows HMRC to determine the fraction to be
taken into account. This applies equally to calculating any amount of duty
due from or to a person and is not limited to excise duty on alcohol. No
changes are proposed to these provisions.
7. Section 137(4) of CEMA allows fractions of a penny in any amount due to

be disregarded. This is superfluous since the half penny ceased to be
legal tender. This section is therefore being repealed.

Further advice

BN93
EXCISE REVIEWS AND APPEALS
1. Producers of alcoholic drinks, excise warehousekeepers and businesses

claiming alcoholic ingredients relief.
2. Legislation will be introduced in Finance Bill 2008 to extend the excise

review and appeals system to include certain decisions made by HM
Revenue & Customs (HMRC) which were previously not covered.
Operative date
3. The measure will have effect on and after the date that Finance Bill 2008
4. The current legislation at sections 14-16 of and Schedule 5 to the Finance

Act (FA) 1994 provides a list of the decisions made by HMRC concerning
excise matters that are subject to review and appeal. The proposed
measure will add further decisions to the list where, at present, there are
no rights to review and appeal for decisions under the following sections in
the Alcoholic Liquor Duties Act 1979:
• on drawback, under section 22;
• on repaying excise duty under section 46, or section 61, or section 64;
• on the requirement for security under regulations made under
section13, section 15 or section 77;
• on registration, security or any restrictions on moving goods under
section 41A, section 47 or regulations under section 49;
• for decisions relating to wine and made-wine on licensing and
registration, security or the conditions for moving goods under section
54, section 55 or regulations under section 56; and
• for decisions relating to cider on registration, security or the conditions
for moving goods under section 62.
5. The measure will amend paragraph 2(1)(s) of Schedule 5 to FA 1994,

clarifying that an appeal right exists when a guarantee and other security
is cancelled under section 157 of the Customs and Excise Management
Act 1979, and that a review and appeal right exists when a decision is
made that additional or further security is required. The measure will also
add additional review and appeal rights for decisions on repayment claims
under section 4 of FA 1995.

Further advice
6. If you have any questions about this change, please contact Howard
Buttery on 0161 827 0340 (email: howard.buttery@hmrc.gsi.gov.uk).
Information about Budget measures is available on the HM Revenue and
Customs website at www.hmrc.gov.uk.

BN94
WAIVING INTEREST AND SURCHARGES FOR THOSE

AFFECTED BY NATIONAL DISASTERS
1. Taxpayers with tax payable who are adversely affected by events

designated as national disasters. The first beneficiaries of this measure
will be taxpayers who were unable to pay their taxes on time as a
consequence of the severe floods that affected the UK in June and July of
2007.
2. Legislation will be introduced in Finance Bill 2008 to provide for a power

allowing interest and surcharges payable to HM Revenue & Customs
(HMRC) to be waived by secondary legislation in the context of events
designated as national disasters. HMRC will use this power to meet the
commitment the Government made on 25 July 2007 to waive interest and
surcharges on tax paid late due to the severe floods that affected the UK
in June and July of 2007.
Operative date
3. The measure will have effect from the date that Finance Bill 2008 receives
Royal Assent. The power will first be used, with retrospective effect, to
waive interest and surcharges on tax paid late as a result of the severe
flooding that affected the UK in June and July of 2007.
4. Legislation, for example in Part IX of the Taxes Management Act 1970,

requires interest to be charged on all unpaid tax from the date it becomes
due until the date of payment.
5. This measure will introduce a power that would allow the Commissioners
of HM Revenue & Customs to waive interest and surcharges where tax
and / or duties are paid late because of a disaster of national significance.
6. Section 107 of the Finance Act 2001 ensured that those affected by foot
and mouth should have the interest charge removed where the then Inland
Revenue agreed, because of the effect of the foot-and-mouth disease
outbreak, to defer the payment of tax. The proposed legislation is
modelled on that provision.
7. The Government announcement made on the 25 June 2007 can be found

at www.gnn.gov.uk

Further advice
8. If you have any questions about this change, please contact Robert Horwill
on 0207 147 2447 (email: robert.horwill@hmrc.gsi.co.uk). Information

BN95
POWER TO GIVE STATUTORY EFFECT TO EXISTING

CONCESSIONS
1. Individuals, organisations and businesses.
2. The decision in the case of ‘The Queen (on the application of John
Wilkinson) v. The Commissioners for Her Majesty’s Revenue and
Customs’ (‘Wilkinson’) made clear that the scope of the discretion of HM
Revenue & Customs (HMRC) to make concessions from the strict
application of tax law is not as wide as had previously been thought.
3. HMRC has been reviewing its concessions in the light of the Wilkinson
judgment and that review is expected to be completed in the autumn. The
majority of HMRC’s concessions are clearly within the scope of its
”collection and management” discretion and so can continue to operate as
they are.
4. Indications are that when the review is completed it will be possible to

legislate a substantial proportion of the remaining minority and so enable
the tax treatment they afford to continue. Legislation will be introduced in
Finance Bill 2008 to provide for existing HMRC concessions (which
include concessions operated by HMRC’s predecessor departments of
Inland Revenue and HM Customs & Excise) to be made statutory by
Treasury order. Details of the outcome of the review, including those extra
statutory concessions to be legislated by order, will be available later in the
year.
Operative date
5. This power will be operative on and after the date that Finance Bill 2008
receives Royal Assent, but no orders under this power are expected to be
made until after HMRC’s review of its concessions has been completed.
6. At present there is no enabling power of this kind to allow existing

concessions to be legislated by order.

7. In the context of this measure:
• “existing HMRC concession” - means any statement made by HMRC
(before the enactment of this measure) which allows a person a
reduction in liability to tax or duty, or allows any other concession in
relation to tax or duty to which there is no legal entitlement; and
• “statement” - means statement of any sort however described.
8. Any order under this power will be made only if a draft of that order has
been laid before, and has been approved by a resolution of, Parliament.
Further advice
9. If you have any questions about this change, please contact David
Stephens on 020 7147 2402 (email: david.stephens@hmrc.gsi.gov.uk).

BN96
HMRC REVIEW OF POWERS, DETERRENTS AND

SAFEGUARDS: PENALTIES FOR INCORRECT RETURNS &
FAILURE TO NOTIFY A TAXABLE ACTIVITY
1. Individuals and businesses who understate their tax liability, deliberately or

by failing to take reasonable care in completing returns for:
• environmental taxes (aggregates levy, climate change levy, landfill
tax);
• excise duties (alcohols, tobacco, oils, gambling and air passenger
duty);
• stamp duties (stamp duty land tax, stamp duty reserve tax);
• accounting for recovery of student loans by employers; and
• inheritance tax, insurance premium tax, pension schemes and
petroleum revenue tax.
2. Individuals and businesses who fail to notify HM Revenue & Customs

(HMRC) of a new taxable activity by the required date, where there is tax
and / or National Insurance Contributions (NICs) unpaid as a result.
3. This measure will not have effect for tax credits.
4. Legislation will be introduced in Finance Bill 2008 to extend the provisions

enacted in Schedule 24 to the Finance Act (FA) 2007, to create a single
penalty regime for incorrect returns across all the taxes, levies and duties
administered by HMRC. The penalty will be determined by the amount of
tax understated, the nature of the behaviour giving rise to the
understatement and the extent of disclosure by the taxpayer. The use of
suspended penalties will be extended.
5. Provision will also be made to extend and adapt Schedule 24 to FA 2007

to cover penalties for failing to register or notify HMRC of a new taxable
activity across all the taxes, levies and duties administered by HMRC,
including late VAT registration.
Operative date
6. The new provisions will have effect from a date to be appointed by

Treasury Order. For incorrect returns, this is expected to be for return
periods commencing on or after 1 April 2009 where the return is due to be
filed on or after 1 April 2010. New penalties for failure to notify are
expected to have effect for failure to meet notification obligations that arise
on or after 1 April 2009.

7. The measure will repeal a large number of different penalty provisions

which are specific to each of the taxes, levies or duties covered and
replace these with a single legislative framework for penalties for incorrect
returns and another similar one for failing to notify a taxable activity by the
required date.
8. The new provisions for incorrect returns will provide for penalties in line
with Schedule 24 to FA 2007, which are based on the amount of tax
understated, the nature of the behaviour and the extent of disclosure by
the taxpayer. There will be no penalty where a taxpayer makes a mistake
but there will be a penalty of up to:
• 30 per cent for failure to take reasonable care;
• 70 per cent for a deliberate understatement; and
• 100 per cent for a deliberate understatement with concealment.
9. The measure will provide for each penalty to be substantially reduced

where the taxpayer makes a disclosure (takes active steps to put right the
problem), more so if this is unprompted. For an unprompted disclosure of
a failure to take reasonable care the penalty could be reduced to nil.
Where a taxpayer discloses fully when prompted by a challenge from
HMRC each penalty could be reduced by up to a half.
10. Where a return is incorrect because a third party has deliberately provided
false information or deliberately withheld information from the taxpayer,
with the intention of causing an understatement of tax due, there will be a
new provision allowing a penalty to be charged on the third party.
11. The measure will also provide for reformed penalties for some specific
excise duty wrongdoings: misusing goods subject to reduced excise duty
rates, e.g. red diesel; and handling goods on which excise duty should
have been paid but has not.
12. For failure to notify a taxable activity there will be no penalty unless there
is tax and / or NICs due but unpaid as a result, nor where the taxpayer has
a reasonable excuse for the failure. Otherwise there will be a penalty of:
• 30 per cent of tax unpaid for non-deliberate failure to notify;
• 70 per cent of tax unpaid for a deliberate failure to notify; and
• 100 per cent of tax unpaid for a deliberate failure with concealment.
Each penalty will be substantially reduced where the taxpayer makes a
disclosure (takes active steps to put right the problem), more so if this is
unprompted.
13. For Class 2 NICs, the provisions will replace the fixed penalty of £100 for
notification more than three months after starting self-employment with a
behaviour based penalty. The obligation to notify remains unchanged.

14. The measure will include full and explicit provisions for the right of appeal
against all penalty decisions.
15. HMRC will continue to consult on guidance on the operation of these

penalty provisions between the date the Finance Bill 2008 receives Royal
Assent and the implementation of the changes. It is intended that
guidance will be published well ahead of implementation.
16. This measure was the subject of a consultation document published on

10 January 2008 – Penalties Reform: The Next Stage with draft clauses
and explanatory notes. A summary of responses to that consultation and
a Final Impact Assessment, including an explanation of any resulting
changes, will be published shortly.
Further advice
17. If you have any questions about this change, please send an email to
powers.review-of-hmrc@hmrc.gsi.gov.uk or contact Maria Richards on

BN97

SAFEGUARDS: COMPLIANCE CHECKS
1. Individuals and businesses who are within the scope of PAYE, VAT,
income tax (IT), capital gains tax (CGT) and corporation tax (CT) and who
pay tax or make claims.
2. Legislation will be introduced in Finance Bill 2008 to reform the rules for
checking that businesses and individuals have paid the correct amount of
IT, CGT, CT, VAT and PAYE or claimed the correct reliefs and allowances.
3. There will be three elements:

• aligned and modernised record keeping requirements;
• new inspection and information powers; and
• aligned and modernised time limits for making tax assessments and
claims.
Operative date
4. Information powers and penalties for failure to comply with these

obligations will have effect on and after 1 April 2009. Time limits for making
assessments and claims will need a transitional period and so will become
fully operative on and after 1 April 2010.
Record Keeping Requirement
5. Primary legislation requires records to be kept which enable a taxpayer to

make an accurate return. Further detail of the required records is then set
out in secondary and tertiary legislation. The current rules differ from tax to
tax and this measure will pave the way for an aligned approach.
Information powers
6. For VAT and PAYE, HM Revenue & Customs (HMRC) has inspection
powers with no rights of appeal. For IT, CGT and CT, HMRC has a
combination of information powers, which need pre-authorisation by the
appeal commissioners and can only be challenged by judicial review and
enquiry powers that can only be used once a self assessment enquiry
notice into a particular return has been issued. Authorisation levels,
penalties and appeal rights differ across the different regimes. The relevant

legislation is at sections 19A and 20 of the Taxes Management Act 1970
(TMA), paragraph 7 of Schedule 11 to the Value Added Tax Act 1994
(VATA), paragraph 27 of Schedule 18 to the Finance Act (FA) 1998 and
Regulation 97 of the Income Tax (PAYE) Regulations 2003.
7. The new powers will align and modernise HMRC’s access to records and
information.
8. The new package will align existing powers and safeguards and introduce:
• a power to inspect records required under the record-keeping
legislation – this restricts the existing VAT and PAYE inspections to
statutory records and introduces a new power of inspection for direct
tax;
• a power to require supplementary information which is relevant to
establishing the correct tax position;
• a power to require third parties to provide information which is relevant
to establishing a taxpayer’s correct tax position;
• a power to visit business premises and to inspect records, assets and
premises;
• removal of VAT and PAYE powers to undertake inspections at private
homes without taxpayer consent;
• appeal rights against any penalty, and against information notices
which have not been pre-authorised by an appeal tribunal;
• penalties for failure to allow an inspection and failing to comply with an
information notice, including a tax-geared penalty which can be
imposed by the new upper tier tribunals; and
• an updated criminal offence of destroying or concealing records
requested under a notice authorised by a tribunal.
Assessment Time Limits
9. Time limits for changing the amount of tax due by assessment vary across
the taxes. Current time limits are set out below:
Tax Mistake Failure to take Deliberate

reasonable care understatement
VAT 3 years 3 years 20 years
section 77 VATA
1994
IT and CGT 5 years 10 20 years 10 months 20 years 10 months
sections 34 & 36 months
TMA 1970
CT 6 years 21 years 21 years
Para 46 Schedule 1
FA 1998
PAYE 5 years 10 20 years 10 months 20 years 10 months
sections 34 & 36 months
TMA 1970
10. The new legislation will align the time limits for assessments to the
following model:

Tax Mistake Discovery Failure to take Deliberate understatement or
reasonable care Failure to notify liability
VAT 4 years N/A 4 years 20 years
IT & CGT N/A 4 years 6 years 20 years
CT N/A 4 years 6 years 20 years
PAYE 4 years N/A 6 years 20 years
11. Time limits for taxpayers’ claims will also be aligned, at 4 years.
12. This measure was the subject of initial consultation in May 2007.
Responses to that consultation together with draft legislation for further
consultation were published on 10 January 2008 – A New Approach to
Compliance Checks: Responses to Consultation and Proposals. A
summary of responses to that consultation and a Final Impact Assessment,
including an explanation of any resulting changes, will be published shortly.
Further advice
020 7147 3223. Information about Budget measures is available on the HM

BN98

SAFEGUARDS: PAYMENTS, REPAYMENTS AND DEBT
1. Individuals and businesses who wish to pay tax and duties etc by credit
card.
2. Those who have not met their obligations to pay what they owe on time.
General description of the measures
3. The measure will make it easier for taxpayers to pay what they owe on
time, and for HM Revenue & Customs (HMRC) to tackle those who seek
to avoid their obligations by paying late or not at all. There are three
separate changes to the current law:
• new legislation to enable HMRC to introduce a credit card payment
service;
• HMRC will be able to set the repayments it must make to individuals
and businesses against the payments it is owed by them; and,
• HMRC’s debt enforcement powers to collect unpaid sums by taking
control of goods in England & Wales, or by taking action through the
civil courts will be modernised and aligned.
Operative dates
4. It is intended that HMRC will be in a position to accept payments by credit

card from Autumn 2008.
5. The ability to set repayments against debt will have effect on and after the
6. The changes to HMRC’s powers to enforce payment through the courts

will have effect on and after the date that Finance Bill 2008 receives Royal
Assent. In England & Wales the power to take control of goods will come
into effect in line with the appointed day for Schedule 12 to the Tribunals,
Courts and Enforcement Act 2007.
7. Legislation supports a range of payment methods, but HMRC cannot

accept payment by credit cards except in certain limited circumstances
such as at ports and airports. Legislation will be introduced in Finance Bill
2008 to allow individuals and businesses to pay tax, duties etc by credit
card. Taxpayers who choose to pay in this way will be charged the
transaction fee that HMRC will itself be charged. Legislation will be needed

because passing on this fee would otherwise be outside the functions of
the Commissioners for HM Revenue & Customs.
8. Under common law, or by request, HMRC may already set-off repayments

payable to taxpayers against debts they owe to HMRC. This measure will
give a specific power to HMRC to make set-off across the different taxes,
duties etc it administers, at its discretion.
9. HMRC’s powers to enforce the payment of civil debt, where reminders and
other actions have not been successful, were inherited from the former
Inland Revenue and HM Customs & Excise. These powers differ across
regimes, which can be confusing for taxpayers and lead to unnecessary
costs to the Exchequer. This package of changes will modernise and align
the enforcement powers in England & Wales and Scotland so that HMRC
may recover debts in a single action. It will also mean an end to the
current practice where taxpayers may face two sets of costs and fees.
10. This measure was the subject of initial consultation in June 2007.
Responses to that consultation together with draft legislation for further
consultation were published on 10 January 2008 – Payments,
Repayments and Debt: Responses to Consultation and Proposals. A
summary of responses to that consultation and a Final Impact
Assessment, including an explanation of any resulting changes, will be
published shortly.
Further advice

BN99
CHANGES TO CUSTOMS POWERS
1. Airport, port, wharf and transit shed operators; and individuals and
businesses involved in the import and export of goods.
2. Legislation will be introduced in Finance Bill 2008 to clarify the powers of

HM Revenue & Customs (HMRC) to examine and search goods and
baggage being imported and exported.
Operative date
3. The changes will come into effect from the date that Finance Bill 2008
4. Section 159(1) of the Customs and Excise Management Act 1979 gives
officers the power to examine goods which are being imported or
exported. Officers may for this purpose require that any containers are
opened and unpacked.
5. The measure will amend section 159(1) to allow customs officers to open
and unpack containers themselves, should they think it necessary, rather
than insisting that it is done by the proprietor of the goods. The changes
will also make clear that HMRC’s powers of examination extend to
searching containers and baggage.
Further advice
6. If you have any questions about this change, please contact Marie
Campbell on 01702 361780 (email: marie.campbell@hmrc.gsi.gov.uk).

BN100
TRIBUNAL REFORM: SIMPLIFYING HMRC'S APPROACH TO

APPEALS
1. Businesses and individuals who may want to appeal against decisions

made by HM Revenue & Customs (HMRC).
2. Legislation will be introduced in Finance Bill 2008 to provide a power to

introduce secondary legislation to change the way appeals against HMRC
decisions are handled.
Operative date
3. The power will have effect on and after the date that Finance Bill 2008
receives Royal Assent. It is intended that the secondary legislation will
come into effect in April 2009 alongside implementation of the Ministry of
Justice tribunal reforms under the Tribunals, Courts and Enforcement Act
2007 (the TCEA).
4. Under the law, the way HMRC deals with appeals reflects the different
history of the two former departments, the requirements of particular taxes
or schemes and the four independent appeals bodies that hear tax
appeals against HMRC decisions.
5. The TCEA creates a First-tier Tribunal into which most existing tribunal
appeal functions will be transferred, including tax appeals, and an Upper
Tribunal which will hear appeals against the decisions of the First-tier
Tribunal (and may hear some first instance appeals in certain
circumstances).
6. This measure will enable the Government to introduce, by Treasury Order,

changes to the legislation about how appeals against decisions made by
HMRC are handled, in particular to provide more consistent arrangements
for internal review before appeals are referred to a tribunal.
7. The consultation Tax Appeals against decisions made by HMRC ran from
October to December 2007. The results of that consultation and proposals
for the way forward are published today on the HMRC website.

Further advice
8. If you have any questions about this change, please contact Eileen
Rafferty on 0207 147 2405 (email: eileen.rafferty@hmrc.gsi.gov.uk).

BN101
TAX LAW REWRITE: REMITTANCE BASIS AND FOREIGN

DIVIDEND INCOME
1. Individuals claiming the remittance basis of taxation who remit foreign

dividend income and who are chargeable to income tax at the higher rate.
2. The rate at which remittance basis users will be liable to income tax on
foreign dividends is being corrected to 40 per cent for those individuals
liable at the higher rate. This corrects an error introduced by the Tax Law
Rewrite.
Operative date
3. This change will have effect for remittances on and after 6 April 2008.
4. Currently, remittance basis users who are higher rate taxpayers are liable
at 32.5 per cent on foreign dividend income remitted to the UK.
5. The Income Tax (Trading and Other Income) Act 2005 mistakenly
changed the rate at which foreign dividend income is charged to tax on
these remittance basis users from 40 per cent to 32.5 per cent. Tax Law
Rewrite Bills are not intended to amend the substance of tax legislation.
6. Legislation will be amended to correct the position so that remittance basis

users liable at the higher rate will be taxed at 40 per cent on foreign
dividend income remitted to the UK.
Further advice
7. If you have any questions about this change, please email

offshorepersonal.taxteam@hmrc.gsi.gov.uk or telephone 020 7147 2762.

BN102
RESIDENCE AND DOMICILE: THE RESIDENCE TEST AND

DAY COUNTING RULES
1. Non-resident individuals visiting the UK and UK resident individuals

leaving the UK.
2. Legislation will be introduced in Finance Bill 2008 to change the way days
are counted for residence test purposes.
Operative date
3. This change will have effect on and after 6 April 2008.
4. Under the current rules, when deciding if an individual is resident in the UK

for tax purposes all days spent in the UK are normally counted, except for
days on which the individual arrives in, or departs from, the UK. At the
Pre-Budget Report it was proposed that days of arrival and days of
departure should count as a day of presence in the UK, subject to an
exemption for transit passengers.
5. The changes announced today mean that on and after 6 April 2008, any
day where the individual is present in the UK at midnight will be counted
as a day of presence in the UK for residence test purposes.
6. There will be an additional exemption for passengers who are in transit

between two places outside the UK. The exemption is wider than that
proposed at the Pre-Budget Report as it caters for people who have to
change airports or terminals when transiting through the UK. It will also
allow people to switch between modes of transport, so they could fly in but
leave by ferry or train for example. Days spent in transit, which could
involve being in the UK at midnight, will not be counted as days of
presence in the UK for residence test purposes so long as during transit
the individual does not engage in activities that are to a substantial extent
unrelated to their passage through the UK. So, for example, if they take
time out to attend a business meeting then the transit exemption will not
have effect.

Further advice


BN103
RESIDENCE AND DOMICILE: PERSONAL ALLOWANCES AND

THE REMITTANCE BASIS
1. UK residents paying tax on the remittance basis who have unremitted

foreign income and gains in excess of £2,000 a year.
2. Legislation will be introduced in Finance Bill 2008 to end entitlement to

certain personal allowances and reliefs for income tax for individuals
resident in the UK who claim to use the remittance basis of taxation.
These individuals will similarly lose access to the annual exempt amount
(AEA) for capital gains.
Operative date
4. All UK residents are entitled to a personal tax allowance and reliefs for
income tax and the AEA for capital gains. The majority also pay tax on
their worldwide income and gains even if that income and gains remains
offshore. UK residents who are either not domiciled, or not ordinarily
resident, in the UK can pay tax on the remittance basis which means that
income and gains arising overseas are taxed in the UK only when, and if,
they are brought into the UK.
5. On and after 6 April 2008, individuals who claim use of the remittance
basis will not be entitled to any of the personal income tax allowances.
This includes the basic personal allowance and age-related allowances,
blind person’s allowance, tax reductions for married couples and civil
partners and relief for life insurance payments. Remittance basis users
will also lose access to the AEA for capital gains.
6. A de minimis limit will have effect so that remittance basis users who have
unremitted foreign income and gains of less than £2,000 a year will be
able to retain access to any of the personal income tax allowances to
which they are entitled and the AEA for capital gains. This £2,000 limit is
instead of the £1,000 limit proposed in the Pre-Budget report.

7. Individuals who have access to the remittance basis of taxation can
choose each year whether they wish to claim the remittance basis of
taxation or pay tax on their worldwide income and gains. Individuals will
be entitled to the personal income tax allowances and the AEA for capital
gains in a particular year if they do not claim the remittance basis in that
year.
Further advice


BN104
RESIDENCE AND DOMICILE: CLOSING LOOPHOLES IN THE

REMITTANCE BASIS
1. UK residents paying tax on the remittance basis.
2. Legislation will be introduced in Finance Bill 2008 to remove various

loopholes and anomalies which allow remittance basis users to remit
income and gains to the UK without paying tax on them.
Operative date
3. The majority of these changes will have effect on and after 6 April 2008.
However some have effect on and after 12 March 2008. Operative dates
are provided below.
4. There will be a number of changes made to the way the remittance basis
works. An explanation of the current remittance basis rules and how they
will change follows.
‘Ceased source’
5. Foreign savings and investment income are not currently taxed when
remitted to the UK if the source of the income no longer exists in that year.
6. Legislation will be amended so that where the remittance basis has been
claimed for a year, income of that year will be liable to tax if it is remitted to
the UK, even where the source of the income has ceased in a previous
year. The legislation to achieve this was published in draft on
18 January 2008.
‘Cash only’
7. Relevant foreign income can only currently be taxed if it is brought into the
UK as cash. If a remittance basis taxpayer turns relevant foreign income
into an asset outside the UK and then imports that asset, no UK tax can be
charged on the income unless and until the asset is sold or turned into
cash in the UK.

8. Legislation will be changed so that money, property and services derived
from relevant foreign income brought into the UK will be treated as a
remittance and will be taxed as such.
9. There will be exemptions for personal effects (that is, clothes, shoes,
jewellery and watches), assets costing less than £1,000, assets brought
into the UK for repair and restoration and assets in the UK for less than a
total nine month period purchased out of relevant foreign income. There is
also a new exemption from a remittance basis tax charge for works of art
brought into the UK for public display. That is explained in BN105.
10. Any asset purchased out of untaxed relevant foreign income which an
individual owned on 11 March 2008 will be exempt from a charge under
the remittance basis, for so long as that individual owns it, even if that
asset is currently outside the UK and later imported. Any asset in the UK
on 5 April 2008 will also be exempt from a charge under the remittance
basis, for so long as the current owner owns it, even if that asset is later
exported and the re-imported. The existing charge that arises if such an
asset is sold in the UK will remain.
11. The current rules for employment income and capital gains already tax
assets when they enter the UK where they were purchased out of untaxed
foreign employment income or capital gains. Those rules remain
unchanged.
‘Claims mechanism’
12. Foreign savings and investment income arising in a year in which the
remittance basis is claimed are not currently taxed if remitted in a
subsequent year in which no claim to the remittance basis is made.
13. Legislation will be introduced so that foreign savings and investment

income arising in a year in which the remittance basis is claimed will be
taxed if it is remitted to the UK, irrespective of the year in which it is
remitted and whether or not a claim to the remittance basis is made in the
year in which the remittance is made. The legislation to achieve this was
published in draft on 18 January 2008.
Mixed funds
14. There are currently no statutory rules on the treatment of remittances from
funds which include some combination of untaxed relevant foreign income,
employment income, capital gains, taxed income or gains and capital.
15. Legislation will be introduced to lay down clear statutory rules for
determining how much of a transfer from a mixed fund is treated as the
individual's income or chargeable gains, and the manner in which these
amounts are chargeable to tax. These rules will be more comprehensive
than the rules in the draft legislation published on 18 January 2008.

Alienation
16. The law currently allows overseas income and gains to be alienated by a
non-domiciled or not ordinarily resident individual to a third party, such as
an offshore vehicle or a close relative. That alienated income or gains can
then be brought into the UK in such a way that the individual whose
income or gain it originally was has the use or enjoyment of it in the UK
without attracting a charge to tax.
17. Legislation will be introduced that will have effect where an individual
arranges for money or property to be brought into the UK, or services and
benefits to be provided in the UK, that were funded out of untaxed foreign
income or gains. Where that individual, or their immediate family, benefits
in any way then that individual will be taxed on that money, property,
services or benefits under the remittance basis rules of taxation.
18. The definition of an individual’s “immediate family” will be different from the
“relevant person” definition proposed in the draft legislation published on
18 January 2008. It will be limited to spouses, civil partners, individuals
living together as spouses or civil partners and their children or
grandchildren under 18. It will also cover close companies, or foreign
companies that would be close if in the UK, of which any of them are
participators and trusts of which any of them are settlors or beneficiaries.
Non-resident trusts
19. There will be extensive changes to the capital gains tax regime for
non-resident trusts. The new rules will be different from the changes
detailed in the draft legislation published on 18 January 2008.
20. Non domiciled beneficiaries of non-resident trusts who claim the

remittance basis will, from 6 April 2008, be taxed on the remittance basis
on all UK and offshore assets.
21. Trustees will be able to make an irrevocable election to rebase assets held
as at 6 April 2008 for the purpose of excluding any part of a chargeable
gain relating to the period before 6 April 2008 from being taxed on non
domiciled beneficiaries.
22. Settlors and beneficiaries of non-resident trusts will not be required to

disclose information to HMRC about trust assets in relation to which a
remittance arose, or details of the trustees, provided they have made a
correct return of their tax liabilities.
23. Beneficiaries of non-resident trusts may be required to provide additional

information to HMRC where the trustees choose to make an election to
rebase trust assets or where HMRC enquire into a beneficiary’s tax return.
24. Full details of the new rules are set out in the supplementary document
“Residence and Domicile: Taxation of distributions to beneficiaries of
non-resident trusts.” One of the changes comes into effect on 12 March
2008 (see paragraph 11(d) of the document).

Non-resident companies
25. Anti-avoidance legislation designed to prevent UK residents from realising

chargeable gains free of tax through a holding in a non-UK resident
company does not currently have effect for non-domiciled individual
participators.
26. The legislation will be amended so these anti-avoidance rules ensure that
UK participators of foreign companies will be taxed on the chargeable
gains accruing to the company irrespective of the participator’s domicile.
The legislation to achieve this was published in draft on 18 January 2008
although some minor changes will be made as a result of the consultation.
Transfer of Assets Abroad
27. Anti-avoidance legislation designed to prevent individuals from avoiding

income tax by transferring assets abroad will be amended to ensure these
anti-avoidance provisions apply to non domiciled individuals. The
remittance basis will apply to remittance basis users.
Accrued Income Scheme
28. Currently, income tax charges under the Accrued Income Scheme apply to
domiciled individuals but not to the non-domiciled.
29. Legislation on the Accrued Income Scheme will be amended so that the
income tax charge has effect for non-domiciled individuals as well as
domiciled individuals. The legislation to achieve this was published in draft
on 18 January 2008.
Capital Gains Tax Losses
30. Currently, non-domiciled individuals get no capital gains tax relief for
losses arising offshore as the remittance basis of taxation is compulsory
for them with respect to capital gains tax. From 6 April 2008 individuals
will be able to elect in and out of the remittance basis on a year by year
basis so a non-domiciled individual could pay capital gains tax on
unremitted foreign gains in a year they are taxed on the arising basis.
31. Legislation on capital gains tax will be amended so that non-domiciled

individuals taxed on the arising basis who have not claimed the remittance
basis from 2008-09 will get relief for foreign losses. Individuals who claim
the remittance basis from 2008-09 will be able to elect into a regime that
enables them to get relief for their foreign losses in the UK in years they
are taxed on the arising basis. That election will be irrevocable and as it
will require non-domiciles to disclose details of unremitted capital gains the
election will be optional.

Offshore Mortgages
32. Currently individuals paying tax on the remittance basis who borrow
money from a non-UK institution can repay the interest on that loan out of
untaxed foreign income without giving rise to a tax charge on the
remittance basis, even if the loan is advanced into the UK. The draft
legislation published on 18 January 2008 proposed that repayments on
such loans would be treated as a remittance on or after 6 April 2008.
33. The legislation in the Finance Bill 2008 will include grandfathering
provisions such that untaxed relevant foreign income used to fund interest
repayments on existing mortgages secured on a residential property in the
UK, will not be treated as a remittance on or after 6 April 2008. This
grandfathering will have effect for repayments for the remaining period of
the loan, or until 5 April 2028, whichever is shorter. In addition if the terms
of the loan are varied or any further advances made after 12 March 2008
then the repayments will be treated as remittances from that point.
Further advice

BN105
RESIDENCE AND DOMICILE: REMITTANCE BASIS AND ART

FOR PUBLIC DISPLAY
1. UK individuals claiming the remittance basis of taxation.
2. Legislation will be introduced in Finance Bill 2008 to exempt works of art

from being taxed under the remittance basis if they are brought into the UK
for public display.
Operative date
4. Currently, a work of art which has been purchased offshore from

unremitted untaxed relevant foreign income is not taxed under the
remittance basis when it is brought into the UK. A work of art purchased
offshore from unremitted untaxed employment income or capital gains is
currently taxable under the remittance basis when brought into the UK.
5. Legislation will be introduced in Finance Bill 2008 to introduce a new

scheme that will allow works of art, purchased overseas from unremitted
untaxed employment income, capital gains or relevant foreign income, to
be brought into the UK for public display without giving rise to an income
tax or capital gains tax charge under the remittance basis.
6. This new scheme will be based on the existing HM Revenue & Customs
schemes for VAT and import duty (temporary imports and items brought
into the UK permanently by museums and galleries). It will allow for works
of art to be imported either indefinitely or temporarily without giving rise to
a charge to tax on the remittance basis so long as that work of art is on
public display in an approved establishment. Works of art not on display,
but held by approved establishments for the public to see or for
educational purposes, will also be covered by the scheme.
7. This exemption for art is in addition to any exemptions which have effect
for assets more generally.

Further advice


BN106
RESIDENCE AND DOMICILE: CHANGES FOR

EMPLOYMENT-RELATED SECURITIES
1. Employees who are taxed on the remittance basis and who receive shares
or options as part of their remuneration, and their employers.
2. Legislation will be introduced in Finance Bill 2008 to bring employees who

are resident but not ordinarily resident in the UK, and who receive
employment-related securities (ERS), within those provisions of Part 7 of
the Income Tax (Earnings and Pensions) Act 2003 (ITEPA) which
currently have effect only for resident and ordinarily resident employees.
3. Where gains on ERS that this measure will bring within Part 7 are partly
derived from employment duties in the UK, and partly from duties outside
the UK, they will be apportioned appropriately, with gains from ERS
related to duties outside the UK being subject to UK Income Tax to the
extent that they are remitted.
4. A similar apportionment will be available to individuals who are not

domiciled in the UK in certain circumstances.
Operative date
5. The measure will have effect on and after 6 April 2008 in respect of
employment-related securities acquired or options granted on or after that
date. Securities acquired or options granted on or before 5 April 2008 will
not be affected.
6. Employment-related securities and securities options are shares and other

securities, and options over such shares or securities, which are acquired
by an employee by reason of his or her employment. Chapters 1 to 5 in
Part 7 of ITEPA provide the income tax rules for employment income from
such securities and options.

7. Employees who are not both resident and ordinarily resident in the UK
(R/OR) at the time employment-related securities or securities options are
acquired are not within the scope of Part 7 of ITEPA, except for Chapters
3A-3D. This means that those who are R/OR at the time of acquisition are
subject to all the rules in Part 7, but those who are resident / not ordinarily
resident (R/NOR) are only within Chapters 3A-3D of Part 7. Part 7 does
not therefore deal with R/NOR employees who receive this type of
remuneration in a comparable way to R/OR employees.
8. Changes will be introduced in Finance Bill 2008 to Part 7 of ITEPA which

will bring R/NOR employees within all Chapters of the Part 7 regime so
that their remuneration from employment related securities or options is
subject to the same rules as for R/OR employees. Where such employees
are taxed on the remittance basis, the measure will provide apportionment
of the ERS income to ensure that that proportion relating to overseas
duties will only be subject to Income Tax when it is remitted to the UK.
9. A similar apportionment basis will be available to non-domiciled individuals

where the ERS income relates to a foreign employment where the duties
are performed wholly outside the UK.
Further advice
10. If you have any questions about this change, please contact Claire Talbot
on 020 7147 2867 or Tom Rollinson on 020 7147 2866 (email:
shareschemes@hmrc.gsi.gov.uk). Information about Budget measures is

BN107
RESIDENCE AND DOMICILE: ANNUAL £30,000 CHARGE FOR

SOME USERS OF THE REMITTANCE BASIS
1. Adults who are UK residents, who have been UK residents for more than
seven of the past ten years, who claim the remittance basis of taxation and
who have unremitted foreign income and gains in excess of £2,000 a year.
2. Legislation will be introduced in Finance Bill 2008 to ensure that adult

non-domiciled, or not ordinarily resident, individuals who have been in the
UK more than seven of the past ten tax years, will be able to continue to
access the remittance basis of taxation on payment of an annual charge of
£30,000 charged on the foreign income and gains they leave outside the
UK, unless their unremitted foreign income and gains are less than
£2,000.
Operative date
4. Currently, UK residents who are either not domiciled or not ordinarily

resident in the UK can access the remittance basis of taxation without any
UK tax being charged on the foreign income and gains they leave outside
the UK. So the remittance basis means that income and gains arising
overseas are only taxed in the UK when they are brought into the UK.
5. On and after 6 April 2008, non-UK domiciled and / or not ordinarily

resident adults who claim the remittance basis of taxation, who have been
resident in the UK more than seven of the past ten tax years, will have to
pay a £30,000 annual tax charge in respect of the foreign income and
gains they leave outside the UK. This £30,000 charge is in addition to any
tax due on UK income and gains or foreign income and gains remitted to
the UK.
6. Following consultation there are 3 main changes to the draft legislation

published on 18 January. These are:
• in the draft legislation the charge did not have effect for remittance
basis users who have unremitted foreign income and gains of less than
£1,000 in the year of assessment. This has been raised to £2,000;
• the charge will apply only to adults so that individuals under the age of
18 will not have to pay the £30,000 charge until the year they turn 18;

• the tax charge will take a different form from the one set out in the draft
legislation. It will be a tax charge on unremitted income and gains
rather than a stand alone charge.
7. The £30,000 annual tax charge will be payable through the self
assessment system. If the adult pays the £30,000 tax charge from an
offshore source directly to HM Revenue & Customs (HMRC) by cheque or
electronic transfer, the £30,000 will not itself be taxed as a remittance. If
the £30,000 is repaid it will be taxed as a remittance at that point.
8. Individuals who have access to the remittance basis of taxation can

choose each year whether they wish to claim the remittance basis of
taxation or pay tax on their worldwide income and gains. Adults will not
have to pay the £30,000 minimum tax charge for a particular year if they
do not claim the remittance basis for that year.
9. The tax charge to be introduced from April 2008 will take a different form
from the one set out in the draft legislation published on 18 January. It will
be a tax charge on unremitted income and gains (or a combination of the
two) rather than a stand alone charge. Individuals paying the charge will
choose what foreign unremitted income or gains the £ 30,000 is paid on.
As a result the tax paid will either be income tax or capital gains tax. The
unremitted income or gains upon which the £ 30,000 tax has been paid will
not be taxed again when and if it is eventually remitted to the UK. There
will be ordering rules that determine that untaxed unremitted foreign
income or gains will be treated as remitted before income or gains upon
which the £ 30,000 has been paid.
10. The £30,000 charge will be income tax or capital gains tax and should be
treated as such for the purposes of Double Taxation Agreements. The tax
will also be available to cover Gift Aid donations.
11. Further information on the £30,000 charge, and in particular how it will be
treated by the US under the UK/US double taxation agreement and
applicable US domestic tax law is available on the HM Treasury website
at: www.hm-treasury.gov.uk
12. For convenience, that information is reproduced as an Annex to this

Budget Note.
Further advice

ANNEX TO BN107: RESIDENCE AND DOMICILE: ANNUAL
£30,000 CHARGE FOR SOME USERS OF THE REMITTANCE
BASIS
March 11, 2008
MEMORANDUM FOR HER MAJESTY'S TREASURY
RE: UNITED STATES FEDERAL INCOME TAX

CONSEQUENCES TO UNITED STATES CITIZENS OF
CERTAIN PROPOSED REVISIONS TO THE UNITED
KINGDOM REMITTANCE BASIS OF TAXATION
You have requested our advice regarding certain of the United States
federal income tax consequences of specific proposed revisions to the current United
Kingdom remittance basis of taxation as applied to United States citizens subject to
that tax. This memorandum responds to that request.
As we have discussed, Skadden has many partners and employees

based in London, including many United States citizens, who would be affected by
the proposed revisions. Several of these individuals have been and continue to be
public in their opposition to them. In this context we want to be clear that, in
accordance with our terms of engagement, our advice is limited to the United States
federal income tax consequences of the proposed revisions and does not address other
matters, including the merits of the policies that form the basis for the proposals,
which are, of course, matters for the Chancellor of the Exchequer and not for us.
You have provided us with a brief description of the proposals as well

as a copy of your instructions to counsel describing the proposals. Our understanding
of the proposals is based on these materials and on our discussions with
representatives of Her Majesty's Treasury and Her Majesty's Revenue & Customs.
We have not reviewed draft legislation implementing the proposals. Any changes to
the proposals as described herein could affect our analysis and the views we express.
Our advice is principally based on the United States Internal Revenue

Code of 1986, as amended (the "Code"), and regulations issued by the United States
Treasury thereunder ("Treasury Regulations"), and on the Convention Between the
Government of the United States of America and the Government of the United
Kingdom of Great Britain and Northern Ireland for the Avoidance of Taxation and the
Prevention of Fiscal Evasion with Respect to Taxes on Income and Capital Gains
currently in force (the "Treaty"), and the United States Treasury's Technical
Explanation1 of the Treaty (the "Technical Explanation"). We have met with
representatives of the United States Treasury and the Internal Revenue Service
1
Department of the Treasury, Technical Explanation of the Convention Between the Government of
the United States of America and the Government of the United Kingdom of Great Britain and
Northern Ireland for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with
Respect to Taxes on Income and On Capital Gains.

("IRS") to discuss our analysis and views, but neither agency has in any manner
endorsed our analysis or the views we express.
This memorandum is divided into several parts. First, we describe the

proposals establishing a Remittance-Based Minimum Charge ("RBMC"). Second, we
analyze the creditability of the RBMC against United States federal income tax.
Third, on the assumption the RBMC is a creditable foreign tax for United States
federal income tax purposes, we analyze the potential limitations on the ability of
United States citizens to utilize the RBMC as a credit against the United States federal
income tax on non-United States source income under the Code, and against the
United States federal income tax on United States source income under the Treaty.
Finally, we provide our concluding views.
This memorandum is intended to provide you with an overview of the

issues discussed herein without reference to the facts and circumstances of any
particular United States taxpayer. Accordingly, it is not intended as tax advice for any
taxpayer, and it was not written, and cannot be used by any taxpayer, for the purpose
of avoiding penalties that may be imposed under the Code.
Description of United Kingdom Treasury Proposal
In general, persons resident and domiciled in the United Kingdom are

taxed on their worldwide income and capital gains as they arise. Those persons who
are resident but not domiciled in the United Kingdom ("resident non-doms") may
elect, alternatively, to be taxed on the remittance basis, under which non-United
Kingdom source income and capital gains are subject to tax only when remitted to the
United Kingdom.2 Generally, income and capital gains are considered remitted under
United Kingdom tax law when they are transmitted or brought to the United
Kingdom. With respect to any remittance, taxpayers bear the burden of establishing,
where appropriate, that such remittance is not out of previously unremitted income or
capital gains (for example, a remittance reflecting a return of capital or pre-residency
income). The tax rate applied to remittances that reflect income or capital gains
depends on the character of the remittance. On or after April 6, 2008, a maximum
rate of 40%3 applies to remitted employment and other income generally, and an 18%
rate applies to remitted capital gains.
Her Majesty's Treasury is proposing a number of changes to the

remittance basis of taxation including an amendment that, if enacted, would cause
certain resident non-doms who elect the remittance basis to pay a minimum tax
(called a Remittance Basis Minimum Charge or "RBMC") on non-United Kingdom
source income and capital gains not remitted to the United Kingdom in the year
earned. In particular, persons who are resident for United Kingdom tax purposes in
the current year, and were resident for seven of the prior nine tax years, and who elect
the remittance basis for the current year, will be required to pay an RBMC of £
30,000 on unremitted non-United Kingdom source income and capital gains. For this
2
Domiciliaries of the United Kingdom who, for the purposes of United Kingdom tax law, are
"resident but not ordinarily resident" in the United Kingdom may also elect to be taxed on the
remittance basis.
3
In general, employment and other income are subject to graduated rates of 20% and 40%. (There is
also a savings rate of 10% applied to a narrow range of income.)

purpose, the taxpayer may designate whether the RBMC is levied on (i)
unremitted non-United Kingdom source income, (ii) unremitted non-United Kingdom
source capital gains, or (iii) a combination thereof. Further, the RBMC is levied on
the amount of unremitted non-United Kingdom source income or capital gain, or
combination thereof, that would give rise to a £ 30,000 liability, after taking into
account any credit for source based non-United Kingdom income tax reliefs, losses
and allowances.
Resident non-doms whose net liability for United Kingdom tax on non-
United Kingdom source income is less than the RBMC should choose to report their
worldwide income and capital gains on an arising basis (which also provides for
certain allowances not permitted to taxpayers filing on a remittance basis). Any
resident non-dom initially filing on a remittance basis and paying RBMC can amend
his or her filing for a period of up to one year from the date thereof to report
worldwide income and capital gains on an arising basis and receive a refund of any
RBMC paid in excess of net income tax liability. Otherwise the RBMC is not
refundable.
The amount of income and capital gains determined to have been taxed
through the RBMC will be previously "taxed" (or "franked") income if it is later
remitted. For this purpose, remittances will be statutorily determined to be made first
out of income and capital gains upon which RBMC has not been levied ("untaxed"
income and capital gains) until all such income cumulatively arising (and not taxed on
the arising basis) since the beginning of the first year of United Kingdom residency
has been remitted (or, if later, since the beginning of the tax year beginning April 6,
2008). The net effect of this system is that electing resident non-dom taxpayers who
remit the entirety of their cumulative non-United Kingdom source income and capital
gains will pay no more than the relevant United Kingdom income tax rate[s] times
their cumulative pre-foreign tax worldwide net income and capital gains, reduced by
any credits for non-United Kingdom source based foreign tax. All other electing
resident non-doms will pay a lesser amount of United Kingdom tax. To administer
these rules, a system of pools and specific rules will track: (i) the amount of
unremitted non-United Kingdom source income and capital gains upon which RBMC
has been determined to have been levied, (ii) the amount and character of untaxed
unremitted non-United Kingdom source income and capital gains, and (iii) the amount
of source based foreign tax associated with untaxed income and capital gains.4
We understand Her Majesty's Treasury estimates that the RBMC will

generate approximately 50% of the annual revenues of the tax charged through the
remittance basis on non-United Kingdom source income taking into account all
proposed revisions to that basis of taxation. In addition, it is expected that a
substantial number of resident non-doms who previously filed on a remittance basis
will switch to filing on an arising basis.
Analysis of Proposal
Article 24 of the Treaty provides that the United States shall allow
United States residents and citizens a credit against United States federal income tax
4
Subcategories of the pools will track types of income, such as dividends, and the associated
foreign taxes.

for certain taxes paid or accrued to the United Kingdom.5 Section 901 of the Code6
permits United States citizens, resident aliens, and corporations to claim a credit for
income, war profits and excess profits taxes (“income taxes”) paid or accrued to a
foreign country.7 In addition, a tax imposed in lieu of an income tax otherwise
generally imposed by a foreign country is treated as an income tax for section 901
purposes.8 This memorandum discusses whether the RBMC as proposed is creditable
under the Treaty or section 901 and, if so, the possible treatment of that credit under
the credit limitation rules of section 904 and the Treaty.
A. Whether the RBMC is creditable under the Treaty
Article 24 of the Treaty provides that the United States "shall allow to
a resident or citizen of the United States as a credit against the United States tax on
income the income tax paid or accrued to the United Kingdom by or on behalf of such
citizen or resident."9 The United Kingdom taxes covered by this provision (the
"covered taxes") include: "(i) the income tax; (ii) the capital gains tax; (iii) the
corporation tax; and (iv) the petroleum revenue tax,"10 as well as "any identical or
substantially similar taxes that are imposed after the date of signature of [the Treaty]
in addition to, or in place of, the existing taxes."11
The Treaty provides that "all taxes imposed on total income, or

elements of income" shall be regarded as taxes on income and on capital gains,
"irrespective of the manner in which they are levied."12 The Technical Explanation of
the Treaty describes the remittance basis of taxation as imposing tax "on income from
sources outside the United Kingdom . . . to the extent such income is remitted to the
United Kingdom."13 Accordingly, the United States Treasury clearly understood the
remittance basis of taxation to be a tax on an element of income—income and capital
gains from non-United Kingdom sources to the extent remitted. Consequently, we
believe that the tax levied on the remittance basis should be viewed as a covered tax,
creditable under Article 24.
The foregoing analysis should not be affected by the inclusion of the

RBMC as a feature of the remittance basis of taxation for the following reasons. We
understand that Her Majesty's Treasury and Her Majesty's Revenue & Customs intend
to treat the RBMC as a tax covered under the Treaty as part of the remittance basis of
taxation. Moreover, the remittance basis of taxation, as amended to include the
RBMC, will continue to tax elements of income: remitted non-United Kingdom
source income and capital gains and a portion of unremitted non-United Kingdom
5
Treaty Art. 24(1); Art. 2.
6
All section references are to the Code unless indicated otherwise.
7
Section 901(a), (b)(1).
8
Section 903.
9
Treaty Art. 24(1).
10
Treaty Art. 2(3).
11
Treaty Art. 2(4).
12
Treaty Art. 2(1), (2).
13
Technical Explanation at 19 (emphasis added).

source income and capital gains. The RBMC merely adds as an additional element of
income that is actually taxed under the remittance basis, an amount of unremitted non-
United Kingdom source income and capital gains; it does not alter the character of the
tax thereby imposed as a tax on elements of income. Accordingly, we believe that the
remittance basis of taxation, as amended to include the RBMC, should be viewed as a
covered tax, creditable under Article 24.
B. Whether the RBMC is creditable under section 901
Section 901 permits a credit for income taxes paid or accrued (or
deemed paid) to a foreign country. Regulations promulgated by the United States
Treasury provide detailed guidance on the criteria used to determine whether a foreign
levy is an income tax for purposes of section 901.14 As a threshold matter, whether a
foreign levy qualifies as an income tax is determined independently for each separate
levy imposed by a foreign country.15 In general, to be creditable, a levy must be a tax
and its predominant character must be that of an income tax in the United States
sense.16 In addition, a tax imposed in lieu of an income tax otherwise generally
imposed by a foreign country is treated as an income tax for section 901 purposes.17
i. Whether the RBMC and tax charged on the remittance basis are
separate levies
In order to determine whether the RBMC is creditable as an income tax

under section 901, it must first be determined whether the RBMC and the remittance
basis of taxation are separate levies.
Whether a single levy or separate levies are imposed by a foreign

country depends on United States federal income tax principles and not on whether
foreign law imposes the levy or levies in a single or separate statutes.18 In general,
levies are not separate merely because some provisions determining the base of the
levy apply, by their terms or in practice, to some, but not all, persons subject to the
levy.19 A foreign taxing authority is viewed as imposing separate levies “where the
base of a levy is different in kind, and not merely in degree, for different classes of
persons subject to the levy.”20
As an example, the Treasury Regulations provide that a foreign levy

identical to the tax imposed by section 871(b) (tax on nonresident alien individuals
engaged in a trade or business within the United States) is a separate levy from a
foreign levy identical to the tax imposed by section 1 (tax on United States citizens
14
Treas. Reg. § 1.901-2.
15
Treas. Reg. § 1.901-2(a)(1) and (d).
16
Treas. Reg. § 1.901-2(a)(1).
17
Section 903.
18
Treas. Reg. § 1.901-2(d)(1).
19
Id.
20
Id.

and resident aliens), as it applies to persons other than those described in 871(b).21
Similarly, foreign levies identical to the taxes imposed by section 11 (tax on income
of corporations), section 541 (tax on undistributed personal holding company
income), section 881 (tax on income of foreign corporations not effectively connected
with the conduct of a trade or business in the United States), section 882 (tax on
income of foreign corporations engaged in a trade or business in the United States),
section 1491 (excise tax on certain transfers of property, repealed in 1997), and
section 3111 (tax on employers) are each separate levies because the base of each of
those levies "differs in kind, and not merely in degree, from the base of each of the
others."22
The base of the remittance basis of taxation, as currently enacted, is the

non-United Kingdom source income and capital gains of resident non-doms who elect
to file on a remittance basis. The base of the RBMC, as proposed, is the non-United
Kingdom source income and capital gains of resident non-doms who elect to file on a
remittance basis and who have been resident for United Kingdom tax purposes in the
United Kingdom for seven of the nine tax years prior to making that election. The
fact that the RBMC is imposed only on a subset of taxpayers who file on a remittance
basis and only on a portion of the income and capital gains which could ultimately be
taxed under the remittance basis of taxation does not mean that the levies are separate.
The Treasury Regulations state that levies are not separate merely because some
provisions determining the base of the levy apply, by their terms or in practice, to
some, but not all, persons subject to the levy.23 In addition, there is no difference in
tax rates between the RBMC and the tax that would be collected under the remittance
basis of taxation. The RBMC and tax charged on the remittance basis are not
different in kind like the separate levies listed in the Treasury Regulations; instead,
the RBMC is analogous to a minimum inclusion provision of the remittance basis
regime. Notably, the Treasury Regulations do not list the Alternative Minimum Tax
imposed under section 55 as a separate levy from the taxes imposed under either
section 1 or section 11. Accordingly, we believe that the RBMC as proposed and tax
charged on the remittance basis should be viewed as part of the same levy.
ii. Whether the remittance basis of taxation, as amended to include

the RBMC, gives rise to an income tax or a tax in lieu of an
income tax for United States purposes
A foreign levy is an income tax if and only if (i) it is a tax, and (ii) the
predominant character of that tax is that of an income tax in the United States sense.24
A foreign levy is a tax in lieu of an income tax only if (i) it is a tax, and (ii) it is in
substitution for an income tax. Whether tax charged on the remittance basis, as
21
Id.
22
Id.
23
Id.
24
Treas. Reg. § 1.901-2(a)(1).

amended to include the RBMC, meets either of these sets of requirements is addressed
below.
a) Whether tax charged on the remittance basis, as

amended to include the RBMC, is a tax
A foreign levy is a tax if it requires a compulsory payment pursuant to

the authority of a foreign country to levy taxes.25 Whether a foreign levy requires a
compulsory payment pursuant to a foreign country's authority to levy taxes is
determined by principles of United States federal income tax law and not by
principles of law of the foreign country.26 Notwithstanding any assertion of a foreign
country to the contrary, a foreign levy is not pursuant to a foreign country's authority
to levy taxes, and thus is not a tax, to the extent a person subject to the levy receives
(or will receive), directly or indirectly, a specific economic benefit from the foreign
country in exchange for payment of the levy.27 For this purpose, a "specific economic
benefit" is an economic benefit that is not made available on substantially the same
terms to substantially all persons who are subject to the income tax that is generally
imposed by the foreign country.28 An economic benefit includes property, a service, a
fee or other payment, a right to use, acquire or extract resources, patents, or other
property that a foreign country owns or controls, or a reduction or discharge of a
contractual obligation.
Tax charged on the remittance basis, as amended to include the

RBMC, will be levied by the United Kingdom government pursuant to its authority to
levy taxes. For those who are subject to the remittance basis of taxation (i.e., those
who elect to file on a remittance basis), payment is compulsory. The fact that a
taxpayer may elect between one of two levies does not mean that either of the levies is
not compulsory for this purpose. For example, in Rev. Rul. 73-588,29 the IRS ruled
that a certain Greek tax was a tax in lieu of an income tax under section 903. The
taxpayer had elected to be subject to the tax in question rather than the otherwise
generally applicable income tax. As described below, to be a tax in lieu of an income
tax, a levy must be a "tax" under Treas. Reg. § 1.901-2(a)(2)(i). Accordingly, implicit
in this ruling is that a levy is no less compulsory because a taxpayer elects to pay it in
lieu of another tax.
In addition, tax charged on the remittance basis is not imposed in

exchange for a "specific economic benefit" of the type listed in the Treasury
Regulations; the only economic benefit that may inure to a remittance basis taxpayer
is a potentially reduced tax liability compared to filing on an arising basis. Clearly, a
reduction in tax liability is not property, a service, a fee or other payment, a right to
use, acquire or extract resources, patents, or other property that a foreign country
owns or controls, or a reduction or discharge of a contractual obligation.
Accordingly, we believe the remittance basis of taxation, as amended to include the
25
Treas. Reg. § 1.901-2(a)(2)(i).
26
Id.
27
Id.
28
Treas. Reg. § 1.901-2(a)(ii)(B).
29
1973-2 C.B. 268.

RBMC, should be viewed as requiring "a compulsory payment pursuant to the
authority of a foreign country to levy taxes" and thus as a tax.
b) Whether the predominant character of tax charged on

the remittance basis, as amended to include the RBMC,
is that of an income tax in the United States sense
If a levy is a tax, it is creditable if it has the predominant character of

an income tax in the United States sense.30 The predominant character of a foreign
tax is that of an income tax in the United States sense if it is likely to reach net gain in
the normal circumstances in which it applies, and liability for the tax is not dependent
on the availability of a credit for the tax against income tax liability to another
country.31 Liability for tax charged on the remittance basis, as amended to include the
RBMC, is not dependent on the availability of a credit for the tax against income tax
liability to another country. Accordingly, whether tax charged on the remittance
basis, as amended to include the RBMC, has the predominant character of an income
tax in the United States sense depends on whether it is likely to reach net gain in the
normal circumstances in which it applies.
A foreign tax is likely to reach net gain in the normal circumstances in

which it applies if and only if the tax, judged on the basis of its predominant
character, satisfies each of three requirements: the realization, gross receipts, and net
income requirements.32
A foreign tax satisfies the realization requirement if, judged on the

basis of its predominant character, it is imposed upon or subsequent to the occurrence
of events ("realization events") that would result in the realization of income under
the income tax provisions of the Code.33 In addition, a foreign tax may satisfy the
realization requirement if it is imposed upon the occurrence of an event prior to a
realization event and certain other requirements are met.34 Tax charged on the
remittance basis, as amended to include the RBMC, is imposed only at or after the
time income or capital gains arise: when remitted or, in the case of the RBMC, prior
to remittance but still at or after the time the income or capital gains arise. We
understand that the predominant character of the concept of income and capital gains
arising in the United Kingdom is equivalent to the concept of income and capital
gains earned by or accrued to a taxpayer in the United States sense. Accordingly,
because the remittance basis of taxation as amended to include the RBMC is imposed
only at or after the time income or capital gains arise, we believe it should meet the
realization requirement.
A foreign tax satisfies the gross receipts requirement if, judged on the
basis of its predominant character, it is imposed on the basis of gross receipts or gross
receipts computed under a method that is likely to produce an amount that is not
30
Treas. Reg. § 1.901-2(a)(1)(ii).
31
Treas. Reg. § 1.901-2(a)(3).
32
Treas. Reg. § 1.901-2(b)(1).
33
Treas. Reg. § 1.901-2(b)(2)(i)(A).
34
Treas. Reg. § 1.901-2(b)(2)(i)(B), (C)

greater than fair market value.35 Tax charged on the remittance basis, as amended to
include the RBMC, will be levied on non-United Kingdom source income and capital
gains remitted to the United Kingdom and that amount of unremitted non-United
Kingdom source income and capital gains of individuals resident for seven of the nine
prior tax years that, if remitted, would produce a £ 30,000 tax liability. This
computation is "likely to produce an amount that is not greater than fair market
value." Only remittances of receipts less expenses paid and net capital gains are
subject to tax charged on the remittance basis, and, accordingly, the tax thus charged
is levied on an amount likely to be not greater than a taxpayer's gross receipts.
Additionally, taxpayers can establish that remittances are not out of gross receipts by
showing, for example, that any particular remittance is attributable to a return of
capital or to earnings prior to the beginning of United Kingdom residency.
Accordingly, we believe the remittance basis of taxation, as amended to include the
RBMC, should be viewed as predominantly imposed on the basis of gross receipts
calculated in a manner likely to produce an amount that is not greater than fair market
value.
A foreign tax satisfies the net income requirement if, judged on the
basis of its predominant character, the base of the tax is computed by reducing gross
receipts to permit recovery of either (i) the significant costs and expenses (including
significant capital expenditures) attributable, under reasonable principles, to such
gross receipts, or (ii) such significant costs and expenses computed under a method
that is likely to produce an amount that approximates, or is greater than, recovery of
such significant costs and expenses.36 The remittance basis of taxation generally
allows the same deductions and credits for particular types of income and capital
gains as those allowable under the arising basis of taxation.37 For example,
remittances of business profits are taxed after a deduction of allowable expenses.
Similarly, the RBMC will be levied on income and capital gains after allowing those
credits and deductions that would be allowable had such income and capital gains
been taxed on the arising basis. Accordingly, we believe the remittance basis of
taxation, as amended to include the RBMC, should satisfy the net income requirement
and therefore should be viewed as having the predominant character of an income tax
in the United States sense.
c) Whether the remittance basis of taxation, as amended to

include the RBMC, is a tax in lieu of an income tax
Even if tax charged on the remittance basis, as amended to include the

RBMC, is not treated as a tax the predominant character of which is an income tax in
the United States sense, it will still be creditable under section 901 if it is determined
to be a tax imposed in lieu of an income tax under section 903. Section 903 treats a
tax imposed in lieu of an income tax otherwise generally imposed by a foreign
country as an income tax for section 901 purposes.38 To qualify as a tax “in lieu of”
35
Treas. Reg. § 1.901-2(b)(3).
36
Treas. Reg. § 1.901-2(b)(4).
37
Taxpayers who file on the remittance basis are not entitled to certain income tax personal
allowances or the annual exemption for chargeable capital gains which are available to United
Kingdom resident taxpayers who file on an arising basis.
38
Section 903.

an income tax, the foreign levy must be a tax and must be “imposed in substitution
for, and not in addition to, an income tax or series of income taxes otherwise
generally imposed.”39 As discussed in Part B.ii.a) of this memorandum, tax charged
on the remittance basis, as amended to include the RBMC, should be treated as a tax.
Accordingly, whether tax charged on the remittance basis, as amended to include the
RBMC, is a tax in lieu of an income tax depends on whether that tax is imposed in
substitution for an otherwise generally imposed income tax.
In determining whether tax charged on the remittance basis, as

amended to include the RBMC, is a tax in lieu of an income tax, the relevant
"otherwise generally imposed" income tax is tax charged on the arising basis. The
remittance basis of taxation, as amended to include the RBMC, and the arising basis
of taxation are alternative bases of taxation and do not apply to tax the same items of
income and gain. In particular, the remittance basis of taxation cannot give rise to tax
on funds that have been previously taxed on the arising basis. Similarly, the arising
basis of taxation cannot tax items of income or capital gains that have been taxed on a
remittance basis. In addition, all income and capital gains taxed on the remittance
basis are income and capital gains that would alternatively have been subject to tax on
an arising basis. Thus, the remittance basis of taxation does not add to the tax that
would have been collected on an arising basis, but instead is an entirely alternative
basis of taxation. Accordingly, if tax charged on the remittance basis, as amended to
include the RBMC, is not treated as having the predominant character of an income
tax in the United States sense, we believe it should be viewed as tax imposed in
substitution for income tax collected on an arising basis and therefore as a tax paid in
lieu of an income tax.
iii. Whether the RBMC, if treated as a separate levy from the tax
charged on a remittance basis, is an income tax
As described in Part B.ii. of this memorandum, a foreign levy is an

income tax if and only if (i) it is a tax, and (ii) the predominant character of that tax is
that of an income tax in the United States sense. A foreign levy is a tax in lieu of an
income tax only if it (i) is a tax and (ii) is in substitution for an income tax. Whether
the RBMC, if treated as a separate levy from tax charged on the remittance basis,
meets either of these sets of requirements is addressed below.
a) Whether the RBMC, if treated as a separate levy from

the tax charged on the remittance basis, is a tax
As described in Part B.ii.a) of this memorandum, a foreign levy is a tax

if it requires a compulsory payment pursuant to the authority of a foreign country to
levy taxes.40 The same reasoning that indicates that tax charged on the remittance
basis, if determined to include the RBMC, is a tax suggests that the RBMC standing
alone is also a tax. The RBMC will be levied by the United Kingdom government
pursuant to its authority to levy taxes. For those who elect the remittance basis, and
who have been United Kingdom tax residents for seven of the prior nine tax years, the
RBMC will be compulsory. The fact that such a taxpayer elects the remittance basis
does not mean that payment of the RBMC is not compulsory. Also, as previously
39
Treas. Reg. §1.903-1(a), (b).
40
Treas. Reg. § 1.901-2(a)(2)(i).

discussed, the RBMC will not be chargeable in exchange for a specific economic
benefit. Accordingly, we believe the RBMC, if treated as a separate levy from tax
charged on the remittance basis, should meet the definition of a tax.
b) Whether the predominant character of the RBMC, if

treated as a separate levy from the tax charged on the
remittance basis, is that of an income tax in the United
States sense
As described in Part B.ii.b) of this memorandum, a levy is creditable,

in addition to being a tax, only if the levy has the predominant character of an income
tax in the United States sense.41 The predominant character of a foreign tax is that of
an income tax in the United States sense if it is likely to reach net gain in the normal
circumstances in which it applies and liability for the tax is not dependent on the
availability of a credit for the tax against income tax liability to another country.42
Liability for the RBMC, if treated as a separate levy from the tax charged on the
remittance basis, is not dependent on the availability of a credit for the tax against
income tax liability to another country. Accordingly, whether the RBMC, if treated as
a separate levy from the tax charged on the remittance basis, has the predominant
character of an income tax in the United States sense depends on whether it is likely
to reach net gain in the normal circumstances in which it applies.
As described in Part B.ii.b) of this memorandum, a foreign tax is likely

to reach net gain in the normal circumstances in which it applies if and only if the tax,
judged on the basis of its predominant character, satisfies each of three requirements:
the realization, gross receipts, and net income requirements.43 The RBMC, if treated
as a separate levy from the tax charged on the remittance basis, arguably meets the
realization requirement because it is levied only at or after the time income or capital
gains have arisen or accrued to the taxpayer. The RBMC, if treated as a separate levy
from the tax charged on the remittance basis, arguably meets the gross receipts
requirement because it is imposed on the basis of gross receipts computed in a manner
likely to reach no more than fair market value in normal circumstances: taxpayers will
generally not elect to file on a remittance basis and pay the RBMC where doing so
would reach more than gross receipts because in such a case the arising basis would
produce a lower liability.44 Taxpayers who erroneously choose the more expensive
levy will be allowed one year to change their election retroactively. Therefore,
overall, the RBMC, if treated as separate from the tax charged on the remittance basis,
is arguably imposed on the basis of gross receipts calculated so as likely to produce an
amount that is not greater than fair market value. Finally, the RBMC, if treated as a
separate levy from the tax charged on the remittance basis, arguably meets the net
41
Treas. Reg. § 1.901-2(a)(1)(ii).
42
Treas. Reg. § 1.901-2(a)(3).
43
Treas. Reg. § 1.901-2(b)(1).
44
Under the Treasury Regulations, amounts paid in excess of a taxpayer's liability under foreign law
(determined so as to reduce, over time, the taxpayer's expected liability under foreign law), are not
amounts of tax paid. Treas. Reg. § 1.901-2(e)(5). Accordingly, a taxpayer who elects to file on a
remittance basis for a particular year and pay the RBMC and whose tax liability for that year is, as
a result, more than it would have been on an arising basis, may be treated as having paid only the
amount of tax that would have been due under the arising basis.

income requirement because, as described Part B.ii.b) of this memorandum, the
RBMC will be levied on income and capital gains after allowing those credits and
deductions that generally would be allowable had such income and capital gains been
taxed on the arising basis. Accordingly, we believe the RBMC, if treated as a
separate levy from the tax charged on the remittance basis, arguably has the
predominant character of an income tax in the United States sense.
c) Whether the RBMC, if treated as a separate levy from

the tax charged on the remittance basis, is a tax in lieu
of an income tax
As discussed in Part B.iii.a) of this memorandum, the RBMC, if

treated as a separate levy from tax charged on the remittance basis, is a tax.
Accordingly whether the RBMC, if treated as a separate levy from the tax charged on
the remittance basis, is a tax in lieu of an income tax depends on whether that tax is
imposed in substitution for an otherwise generally imposed income tax or series of
income taxes.
In determining whether the RBMC, if treated as separate from the tax

charged on the remittance basis, is a tax in lieu of an income tax, the relevant
"otherwise generally imposed" bases of income tax are the arising basis and the
remittance basis. The RBMC would not tax income or capital gains which have been
taxed either under the arising basis or (if regarded as separate from the RBMC) the
remittance basis. The RBMC taxes unremitted non-United Kingdom source income
and capital gains; the remittance basis of taxation only applies to remitted non-United
Kingdom source income and capital gains that have not previously been taxed.
Similarly, income and capital gains previously taxed by the RBMC are by definition
never taxed on an arising basis because the RBMC can only be incurred in situations
where a taxpayer elects for remittance basis in respect of his or her income and capital
gains in any tax year. In addition, all income and capital gains taxed by the RBMC
are income and capital gains that would alternatively have been subject to tax on a
remittance basis or on an arising basis. Accordingly, the RBMC does not add to any
tax chargeable on the arising basis or remittance basis but instead partially replaces
them. The RBMC therefore is arguably imposed in substitution for otherwise
generally imposed income taxes and arguably meets the definition of a tax paid in lieu
of an income tax.
C. Limitation on the use of credits for the RBMC under the Code and
the Treaty
In general, section 904 provides that the total amount of credit

allowable under section 901 shall not exceed the same proportion of the tax against
which such credit is taken as the taxpayer's specified taxable income from sources
without the United States (but not in excess of the taxpayer's entire taxable income)
bears to his or her entire taxable income for the same taxable year.45 The limitation is
determined separately for passive category income and general category income.46
45
Section 904(a).
46
Section 904(d)(1). In general, passive category income is any income received or accrued by any
person which is of a kind which would be foreign personal holding company income as defined in
section 954(c). This includes, for example, dividends, interest, rents and royalties unless derived

This limitation effectively caps the rate of foreign tax that can be used as a credit
against either passive category income or general category income that is non-United
States source income to a taxpayer's average effective rate of United States federal
income tax (before foreign tax credit) on total taxable income. Because of the
benefits of 15% tax rates on certain dividends and capital gains and the potential
benefit of lower than 35% marginal rates on certain levels of other income, most
United States individuals can only utilize foreign tax credits at a rate significantly
below 35%. Given that the RBMC is imposed at an 18% rate on capital gains and a
rate up to 40% on income, a United States citizen will generally not be able to take a
credit against his or her United States federal income tax for the full amount of
RBMC paid unless that citizen has other foreign source income in the same category
taxed at a relatively low foreign tax rate. Any foreign tax, including RBMC, that
cannot be taken as a credit in the year it is paid or accrued can be carried back one
year and carried forward ten years for use against tax on income in the same category
in that other year.
To aid in understanding the ability of United States citizens to take a

credit against United States federal income tax for the RBMC, this Part C. discusses
(i) the allocation and apportionment of the RBMC to categories of income; (ii) the use
of the RBMC as a credit against non-United States source income under the Code;
(iii) the use of the RBMC as a credit against United States source income under the
Treaty; and (iv) the effect of the difference in taxable year between the United States
and the United Kingdom.
i. Allocation and apportionment of the RBMC to categories of

income
In general, for United States credit purposes, the amount of foreign

taxes paid or accrued with respect to a separate category of income (including United
States source income) includes only those taxes that are related to income in that
separate category.47 For this purpose, taxes are related to income if the income is
included in the base upon which the tax is imposed.48 For example, if foreign law
provides for a specific rate of tax with respect to a certain type of income (e.g., capital
gains), or if certain expenses, deductions, or credits (including foreign tax credits) are
allowed under foreign law only with respect to a particular type of income, each such
type of income is a separate base for purposes of determining the amount of foreign tax
imposed on such income. 49 A tax imposed on a base that includes more than one
separate category of income is considered to be imposed on income in all such
categories, and, thus, the taxes are related to all such categories included within the
foreign country's taxable income base. 50 A tax related to a base that includes more
in the active conduct of a trade or business, certain capital gains, and income from notional
principal contracts. General category income is any income that is not passive category income.
Section 904(d)(2)(A)(ii).
47
Treas. Reg. § 1.904-6(a)(1)(i).
48
Id.
49
Id.
50
Id.

than one separate category is apportioned among the separate categories in proportion
to the relative amount of net income in each separate category.51
Under these rules, the RBMC arguably should be treated as related

only to those types of income of the taxpayer (and to those amounts of each) actually
designated by the taxpayer as the unremitted income or capital gains upon which the
RBMC is levied. It is also possible, however, that the United States Treasury and IRS
may not respect the taxpayer's designation as determinative for these purposes. In
such a case, the RBMC might be allocated to each type of income in proportion to the
United Kingdom tax charged on the remittance basis that would be levied on each
type of income if income and capital gains were fully remitted. Alternatively, the
RBMC could be simply apportioned among all categories of taxable income other
than United Kingdom source income (i.e., income and capital gains that are taxed on a
remittance basis only), although such an apportionment would seem inconsistent with
the allocation provisions of Treas. Reg. § 1.904-6(a)(1)(i) given the differences in tax
rates on capital gains and other income and the availability of foreign tax credits
against RBMC with respect to some but not necessarily all income. The
determination of the appropriate allocation and apportionment of the RBMC under the
Treasury Regulations is important to United States citizens because of the limitations
on the use of foreign tax credits discussed below, including most importantly the
limitations on the use of such credits against United States source income under the
Treaty.
ii. The use of the RBMC as a credit against non-United States

source income under the Code
Any RBMC allocated or apportioned to general category income for

United States purposes will be allowed as a credit up to the average effective rate of
United States federal income tax on all income within the general category and taking
into account all foreign taxes attributed or apportioned to that income. With respect
to passive category income, the Code and the applicable Treasury Regulations provide
a special rule under which income received or accrued by a United States person that
would otherwise be passive category income is treated as general category income if
the income is determined to be high-taxed income.52 In general, income of a United
States person is considered to be high-taxed income if, after allocating expenses,
losses and other deductions of the United States person to the income, the sum of the
foreign income taxes paid or accrued by the United States person with respect to the
income exceeds the highest rate of tax specified in section 1 (applicable to
individuals) or section 11 (applicable to corporations), whichever applies, multiplied
by the amount of such income.53 To make this determination, items of income are
assigned to one of four groups: (i) all passive income that is subject to a withholding
tax of fifteen percent or greater, (ii) all passive income that is subject to a withholding
tax of less than fifteen percent (but greater than zero); (iii) all passive income that is
subject to no withholding tax or other foreign tax; and (iv) all passive income that is
subject to no withholding tax but is subject to a foreign tax other than a withholding
51
Treas. Reg. § 1.904-6(a)(1)(ii).
52
Section 904(d)(2)(F); Treas. Reg. § 1.904-4(c)(1).
53
Id.

tax.54 RBMC that is treated as levied on passive income not subject to withholding
will be allocated to this fourth group; such income will likely constitute high-taxed
income to the extent the RBMC rate of tax exceeds the highest marginal rate of tax
imposed by the United States on United States citizens. Passive income that is subject
to withholding will be allocated to one of the first two groups, regardless of whether
the RBMC has been levied on it. Whether that income will be treated as high-taxed
income will depend on what other income is included in that group and the amount of
foreign tax allocated or apportioned to that other income.
iii. The use of the RBMC as a credit against United States source
income under the Treaty
Paragraph 6 of Article 24 of the Treaty provides special rules for the

taxation of certain types of income derived from United States sources by United
States citizens who are residents of the United Kingdom.55 The practical effect of
paragraph 6 is that United States citizens resident in the United Kingdom are taxed on
income from United States sources as follows. First, the United States is entitled to
tax the taxpayer's income from United States sources to the extent the United States
would have imposed tax had the income been paid to or earned by a resident of the
United Kingdom, taking into account any reduced rates of taxation available under the
Treaty to such United Kingdom residents (the "United States source-based tax").
Second, the United Kingdom is entitled to tax the taxpayer's United States source
income but must give a credit for the United States source-based tax (the "United
Kingdom residency-based tax"). Third, the United States is entitled to tax the
taxpayer's United States source income but the incremental United States federal
income tax liability on such income is reduced by the amount of United States source-
based tax on such income as considered above (the "United States citizenship-based
tax"). The United States then provides a credit against this United States citizenship-
based tax for the United Kingdom residency-based tax, but only to the extent such
United Kingdom tax does not exceed the United States citizenship-based tax. Finally,
United States source income is re-sourced as United Kingdom source income to the
extent the United States provides a credit for the United Kingdom residency based
tax.
Applying these rules, United States taxpayers will generally credit the
RBMC against United States citizenship-based tax to the extent the RBMC may be
allocated to certain United States source investment income and capital gains, because
there is no or relatively low United States source-based tax on such income and
capital gain.56 The credit, however, will often be limited to an amount less than the
RBMC because the United Kingdom rates of tax on these types of income currently
exceed the average United States effective tax rates at which foreign tax credits are
allowed. Moreover, to the extent the United States treats the RBMC as allocable to
United States source business profits attributable to a permanent establishment in the
United States or to gain on the sale of real estate located in the United States, no credit
54
Treas. Reg. § 1.904-4T(c)(3).
55
The United Kingdom is not bound to provide a credit for United States federal income taxes with
respect to income from sources without the United States, as determined under United Kingdom
law. Treaty Art. 24(6)a).
56
It may not be possible to credit the RBMC against United States source dividend income of United
States citizens who are eligible to be taxed at a 15% rate under section 1(h)(11).

will likely be allowed, because the United States federal income tax on such income is
levied on the basis of source and not citizenship.
iv. The effect of the difference in taxable year between the United
States and the United Kingdom
The taxable years of individuals in the United States and United

Kingdom are different: in the United States it is the calendar year (that is, January 1
through December 31); in the United Kingdom it is April 6 through April 5. Because
the RBMC may not be due until approximately nine months after the end of the
United Kingdom tax year, it is possible that it will not be paid until the second tax
year (for United States federal income tax purposes) following the tax year in which a
portion of the taxed income was earned for United States federal income tax purposes.
The Treasury Regulations provide that, in allocating taxes between passive category
income and general category income, the nature of the income taxed determines the
allocation even if the income was taxed in a different period.57 Although the Treaty is
silent on this issue with respect to re-sourcing under paragraph 6 of Article 24,
parallel concepts could be applied. Thus, the re-sourcing rule in the Treaty could re-
source the unremitted income upon which the RBMC has been levied even if it is
earned in an earlier tax year (for United States federal income tax purposes) than the
year in which the RBMC is paid or accrues. With respect to non-United States source
income and particularly with respect to United States source income that is re-sourced
under the Treaty, United States taxpayers who claim foreign tax credits on a paid
basis will need to manage tax payments to make sure that when the RBMC is paid it
can be carried back to the year in which the income to which it is attributed for United
States federal income tax purposes was earned.
Concluding Views
We expect that the United States Treasury and IRS will in due course
provide authoritative guidance on some or all of the issues analyzed above, which
guidance may well have retroactive effect. Based on our analysis and subject to the
limitations on the use of credits described herein, it is our view that under current
United States law (including the Treaty), and in the absence of such guidance, the
RBMC should be treated, for United States federal income tax purposes, as a foreign
tax creditable against United States federal income tax. However, given the
limitations on the use of foreign tax credits against United States federal income tax
provided in the Code and the Treaty, and, more importantly, given that the rates at
which the RBMC will be generally imposed is currently higher than the average
effective United States federal income tax rate of individuals, most United States
citizens will not be able to credit against their United States federal income tax all of
the RBMC they pay. The portion of RBMC that cannot be used as a credit will vary
depending on a number of factors, including the amount and character of the income
of any particular United States citizen and on the resolution of various interpretative
issues under Treasury Regulations and the Treaty described above.
SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP
57
Treas. Reg. § 1.904-6(a)(1)(iv).

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Budget 2008

HM REVENUE AND CUSTOMS PRESS OFFICE

GOVERNMENT DEPARTMENT INTERNET SITES

HM Revenue and Customs: www.hmrc.gov.uk

MODERNISING THE PERSONAL TAX SYSTEM

Who is likely to be affected?

1. Income tax payers.

General description of the measure

2. These changes are part of a package of measures announced at Budget

6. Age-related personal allowances for those aged 65 to 74 and 75 and over

7. A Treasury order was made on 10 December 2007 which increased the

9. These changes have effect on and after 6 April 2008.

Current law and proposed revisions

Budget 2008 Notes Page 5 of 270

Budget 2008 Notes Page 6 of 270

CORPORATION TAX MAIN RATES

Who is likely to be affected?

1. Companies with profits above the upper relevant maximum amount

General description of the measure

4. These rates will have effect on and after 1 April 2009.

Current law and proposed revisions

Budget 2008 Notes Page 7 of 270

CORPORATION TAX SMALL COMPANIES’ RATES

Who is likely to be affected?

General description of the measure

2. Legislation will be introduced in Finance Bill 2008 to set the small

4. The measure will have effect on and after 1 April 2008.

Current law and proposed revisions

6. The current rules at section 13 of ICTA provide that, where a company is

7. Legislation introduced in Finance Bill 2008 will amend the small

Budget 2008 Notes Page 9 of 270

Budget 2008 Notes Page 10 of 270

SIMPLIFICATION OF ASSOCIATED COMPANIES RULES

Who is likely to be affected?

1. Companies whose directors or shareholders are separately members of

General description of the measure

2. Simplification of associated companies rules as they apply to the small

3. This measure will have effect on and after 1 April 2008.

Current law and proposed revisions

6. Section 417(3) of ICTA defines the meaning of associate and section

7. Legislation will be introduced in Finance Bill 2008 to revise the definition of

Budget 2008 Notes Page 11 of 270

Budget 2008 Notes Page 12 of 270

AMENDMENTS TO THE RESEARCH & DEVELOPMENT AND

Who is likely to be affected?

1. Companies making claims to relief under the Research & Development

General description of the measure

2. Budget 2007 announced a package of business tax reforms which

4. This measure will have effect from a date to be appointed by Treasury

Current law and proposed revisions

6. Schedule 12 to FA 2002 provides for tax relief for large companies

Budget 2008 Notes Page 13 of 270

8. Legislation to be introduced in Finance Bill 2008 will increase the rate at

Budget 2008 Notes Page 14 of 270

CAPITAL ALLOWANCES: INDUSTRIAL BUILDINGS

Who is likely to be affected?

1. Businesses claiming industrial buildings allowances (IBAs), enterprise

General description of the measure

2. Budget 2007 announced a business tax reform package including the

3. On 17 December 2007, it was announced that the special IBAs commonly

4. Legislation will be introduced in Finance Bill 2008 to give effect to these

5. The phased withdrawal of industrial and agricultural buildings writing-down

Current law and proposed revisions