Expectations of significant and mostly unwanted change impacting on the financial services industry were extremely high ahead of this year's Budget. So what did we get? Well, quite a lot, resulting in substantial scope for effective communication with key clients.
The foundation stone for the renewed attack on tax avoidance appears to have been laid in the shape of proposed disclosure rules aimed at the promoters of potential tax-avoidance schemes and designed to provide the Inland Revenue with information about such schemes at an early stage. This will enable the Revenue to be better informed so that it can counteract such schemes earlier.
It seems that the Revenue may have reviewed both the Australian and US anti-avoidance models. With the Australian one being the more Draconian, we should perhaps be thankful that it appears to have gone for a system more akin to that in operation in the US.
The press release refers to the promoters of certain defined schemes having to give necessary details to the Revenue soon after the scheme is sold. I assume the Revenue has in mind commencement of active promotion as opposed to an actual sale to a buyer. The Revenue will register the scheme and allocate a reference number to it. The promoter will then give the number to any buyer, who will be obliged to include it in their tax return.
There appears to be no special clearance procedure, merely the gathering of information by the Revenue. Taxpayers will thus not have the comfort of Revenue clearance.
If a taxpayer buys a scheme from an offshore promoter which affects their UK tax liability or where a scheme has been devised in house rather than bought from a promoter, the taxpayer will be required to disclose details to the Revenue after the scheme is purchased or first implemented.
Full details of the criteria for disclosable schemes are expected in the Finance Bill. This could lead to more admin for financial institutions looking to promote schemes that have the obtaining of a tax advantage as their main benefit.
Will there be an obligation to tell the authorities about schemes designed long ago which continue to be sold after the specified date or will the disclosure requirements only apply to newly promoted schemes? Financial penalties for not registering are likely to be harsh to encourage compliance.
US experience is interesting in this context. A total of 1,689 disclosures were made in 2001 when registration was introduced but only 29 have been found to be abusive tax shelters by the US authorities.
Moving on to pre-owned assets, there appears to be a communal sigh of relief that carve-out or retained-interest inheritance plans (based, in effect, on intangible assets – life policies) are unlikely to be caught by proposed new provisions imposing an income tax charge on the value of the benefit enjoyed by the donor.
Much will hinge on the wording of the Finance Bill. The key provision in the press release (BN40) is in paragraph seven, which specifies that the income tax charge will only apply to assets formerly owned by the donor or derived from other property so formerly owned to the extent that the taxpayer may derive a benefit from them and only if the benefit derived diminishes benefits potentially available to others.
Some have expressed concern that the insurance-based example in the press release refers to an arrangement where the donor's retained right is to particular benefits such as the return of the life insurance premium. It must be kept in mind that this is an example, not a definition, and it is sited in a press release, not in legislation.
There are a number of variations on the capital investment bond in trust in IHT planning theme and we will have to await the legislation for absolute certainty. If the settlor can benefit under the trust as a discretionary beneficiary and (unusually, say, under a pre-Eversden type scheme) not be caught under the reservation of benefit rules, the new rules would apply. Taxpayers who do not wish to pay the income tax charge and who cannot or choose not to unravel the arrangements can elect for the property to be treated as part of their estate for IHT purposes while they continue to enjoy the benefit.
Property that is actually subject to the gift with reservation rules will not be subject to the income tax charge. Finally, it is generally thought that if an individual's only interest under a trust is (as a creditor) to loan repayments, he will not be entitled to a benefit. Again, sight of the legislation will be needed to confirm this.
For owner-managers of small incorporated businesses, the Budget proposal for the imposition of what amounts to an effective corporation tax charge on distributions at a minimum rate of 19 per cent to non-corporate shareholders represents the manifestation of the threat made in the pre-Budget report. Where the distribution is made out of profits that have not been subject to corporation tax (up to £10,000) or at an average or underlying rate (due to marginal relief) less than 19 per cent (on profits up to £50,000), a rate of 19 per cent will be applied. This will reduce the dividend otherwise payable.
Despite this, for basicand higher-rate taxpaying shareholder directors, the effective rate of deduction on the dividend will still be less than the effective rate (incorporating tax and NI) suffered on salary or bonus assessed as income from employment. The new minimum corporation tax charge applies from April 1, 2004 and is something that all small business advisers should be aware of.