An academic exercise @ 15.15 Sunday 1st August 2010

Posted by: Stephen Relf - Contact Stephen

A response document setting out the latest attempt at simplifying the attribution rules as they apply for associated companies purposes was published last week. Briefly, it is proposed that, from 1 April 2011, rights of associates will only be taken into account where there is substantial commercial interdependence (as defined in legislation and illustrated by HMRC guidance) between the companies in question.

Given that the gap between the small profits and main tax rates are expected to close to 4% by 2014, and that the Office of Tax Simplification is promising a bonfire of reliefs and allowances (at least according to the popular press), could it be that this is all academic anyway and that, from a date yet to be announced, there will be one rate of corporation tax and no associated companies rules to contend with? Let’s hope so.

The response document can be viewed on the HM Treasury website

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The Office of Tax Simplification @ 11.40 Wednesday 21st July 2010

Posted by: Stephen Relf - Contact Stephen

Well, we knew it was coming. First mentioned in the Conservative’s manifesto, then referred to in the Emergency Budget, it was a matter of when, and not if, the Office of Tax Simplification (‘OTS’) would be launched. And now its here and all over the news. Its not often tax makes the headlines but today is an exception. So far, I’ve found only one refuge – Cbeebies, although I’m half expecting George Osborne to turn up in Jackanory Junior later.

Is it good news or bad? Surely everyone must agree that the UK’s tax code is ridiculously complex in parts and in need of an overhaul. 11,000 pages of tax law, as the newsreaders keep telling us (every good story needs a number), is far too much for most of us to cope with. Its also encouraging that John Whiting, the CIOT’s Tax Policy Director, has been appointed as Tax Director of the OTS.

But, as we all know, there’s no such thing as a free lunch and simplification will surely come at a cost. We are told that the first task of the OTS will be to review, and so reduce, the many tax reliefs which are available. Although reductions in tax rates will compensate for this in most cases, it seems likely that some taxpayers who find themselves worse off. A price worth paying for simpler tax law - time will tell!

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Take the CCH Tax Challenge @ 11.12 Monday 12th July 2010

Posted by: CCH

All through July and September CCH are teaming up with Accounting Web to set the CCH Tax Challenge – with the chance to win a £100 John Lewis gift voucher. Every two weeks during these months CCH will be setting a question designed to provoke debate on a topical area of tax. The first is now live: Capital Gains Tax!

Visit Accounting Web to see the challenge and see what other experts suggest doing to deal with the issue.

Grappling with the law @ 11.00 Monday 12th July 2010

Posted by: Stephen Relf - Contact Stephen

When it comes to R&D relief, attention to detail is everything. A number of detailed conditions, many of which have changed over the years, must be satisfied for relief to be available and each represents a pitfall for the unwary. For proof, look no further than the case of Gripple v R & C Commrs.

Gripple Ltd was a wholly-owned subsidiary of Loadhog Limited and the two companies had a common director, Mr Facey. The two companies had entered into an agreement under which Loadhog Limited paid Mr Facey’s salary and then recharged part of this cost to Gripple Limited. Gripple Limited then included these amounts in its R&D claims on the basis that they represented staffing costs.

However, there was a problem. Under what is now CTA 2010, s. 1123(2), emoluments only count as staffing costs if they are paid by the company to the director. In Gripple’s case, the payments had been made indirectly. HMRC therefore rejected the claims and Gripple Limited appealed, unsuccessfully, to the general commissioners. On 30 June, the High Court upheld the judgement of the general commissioners.

There are two lessons to be learnt from Gripple, as follows:

• Planning is key. Additional R&D relief would have been due had Gripple and Loadhog arranged their affairs differently. Worse still, this could have been achieved quite easily by having Loadhog act as a salary agent for Grindle (a point accepted by counsel for HMRC).
• There is no margin for error. Counsel for Gripple had argued that the R&D rules envince “a general intention to provide enhanced relief for expenditure on R&D, and that a generous construction should where possible be adopted in order to further that general aim.” This was rejected by Henderson J who found that “a detailed and prescriptive code of this nature leaves little room for a purposive construction”.

All advisers dealing with R&D claims would be well advised the bear in mind the following words from Henderson J:

“There is no substitute for going through the detailed conditions, one by one, to see if, on a fair reading, they are satisfied.”

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Deferred tax problems @ 10.15 Friday 2nd July 2010

Posted by: Stephen Relf - Contact Stephen

One of the few bits of good news in last week’s Emergency Budget was the announcement that the main rate of corporation tax would fall to 24% by 2014. However, I suspect not everyone looked on this favourably. For those amongst us who have the misfortune to deal with deferred tax, it can only mean one thing – extra work.

Both FRS 19 and IAS 12 require deferred tax assets and liabilities to be measured at the tax rate or rates expected to apply in the period or periods when the asset will be realised or the liability settled. This can be a pain where an asset or liability is expected to unravel over a number of years and different rates of tax apply in each of those years.

For example, a company makes up its accounts to 31 March each year. At 31 March 2011, it has trading losses carried forward of £1m which are expected to be realised over the next four years. Different rates of tax will apply in each of those four years. To establish the tax value of the losses, it is necessary to (1) establish the accounting periods in which the losses will be utilised and (2) apply the tax rate for each period to the appropriate proportion of the losses. So, if the losses are expected to be utilised as follows:

• £100,000 in the year to 31 March 2012 (when the tax rate will be 27%)
• £400,000 in the year to 31 March 2013 (26%)
• £200,000 in the year to 31 March 2014 (25%)
• £300,000 in the year to 31 March 2015 (24%)

The deferred tax asset at 31 March 2011 would be £253,000. For companies with accounting periods which straddle 1 April, it’s even worse!

However, account can only be taken of changes in tax rates where those changes have been enacted, or substantively enacted (3rd reading in the Commons), by the Balance Sheet date. Therefore, the staged reduction should only be taken into account to the extent that it has been enacted or substantively enacted.

Although it looked like the staged reduction would be legislated for in the 2nd Finance Bill of 2010, this no longer seems to be the case as clause 1 of the Bill sets the main rate for FY 2011 only. Assuming that the reductions applying from 1 April 2012 don’t find their way into the 3rd Finance Bill of 2010, a draft of which is expected to be published later this month, life will be a lot easier than expected.

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