Relevant to Advanced Taxation – United Kingdom (ATX – UK)
This article looks at the changes made by the Finance Act 2018 (which is the legislation as it relates to the tax year 2018-19) and should be read by those of you who are sitting ATX-UK in the period from 1 June 2019 to 31 March 2020.
All of the changes set out in the TX-UK article (see ‘Related links’) are relevant to ATX-UK. In addition, all of the exclusions set out in the TX-UK article apply equally to ATX-UK unless they are referred to below.
This article summarises the additional changes introduced by the Finance Act 2018 which have an effect on the ATX-UK syllabus. As with the TX-UK article, this article also includes details of legislation which was enacted prior to 31 July 2018, but came into effect from 6 April 2018.
The Finance (No. 2) Act 2017 did not receive Royal Assent until 16 November 2017 and was therefore not examinable in exams falling in the period 1 June 2018 to 31 March 2019. Therefore, changes made by this Act are included in this article even though most of the changes took effect from 1/6 April 2017.
This article does not refer to any amendments to the ATX-UK syllabus coverage unless they directly relate to legislative changes. We recommend that candidates should therefore consult the ATX-UK Syllabus and Study Guide for the period 1 June 2019 to 31 March 2020 for details of all amendments to the ATX-UK syllabus.
Please note that if you are sitting ATX-UK in the period 1 June 2018 to 31 March 2019, you will be examined on the Finance Act 2017, which is the legislation as it relates to the tax year 2017/18. Accordingly, this article is not relevant to you, and you should instead refer to the Finance Act 2017 article published on the ACCA website.
Various changes have been made in order to strengthen the regime designed to prevent aggressive tax avoidance schemes and to reduce tax evasion. Candidates should be aware of this general tightening of the rules but the details of the changes are beyond the scope of the ATX-UK syllabus.
Lump sum payments
The £30,000 exemption which applies to certain discretionary (ex gratia) lump sum payments is no longer available in respect of non-contractual payments in lieu of notice (PILONs). The whole of such payments will now be taxable in full as earnings in line with the way in which contractual PILONs have always been taxed.
Where the payment made exceeds the payment due in respect of the notice period, the excess will continue to be exempt under the £30,000 rule.
Ex gratia payments which are not PILONs remain eligible for the £30,000 exemption.
The implications of these changes in relation to national insurance contributions (NICs) have not yet been legislated. Accordingly, NICs as they apply to lump sum payments will not be examined in the ATX-UK exam in the period from 1 June 2019 to 31 March 2020.
The concept of an individual’s domicile is important when there are overseas sources of income and/or assets situated overseas. These matters are covered in the International Travellers article available on the ACCA website.
A non-UK domiciled individual who comes to the UK with the intention of returning, in due course, to their home country is likely to retain a non-UK domicile. This is true even where the individual remains in the UK for a considerable period of time. Because of this, there has been the concept of an overseas domiciled individual being deemed to be domiciled in the UK within inheritance tax for many years.
This concept of deemed domicile has now been extended, such that it is now possible for an individual to be deemed domicile for the purposes of income tax and capital gains tax as well as for inheritance tax. In addition, the definition of deemed domicile for the purposes of inheritance tax has been changed to align it with the new definition for income tax and capital gains tax.
Before we consider the new definitions, a reminder of the importance of the concept of domicile in relation to personal tax is set out below.
The importance of an individual’s domicile status – income tax
UK source income is always subject to UK income tax regardless of the individual’s tax status.
Where an individual is not UK resident, overseas income is not subject to UK income tax. There is no need to consider the person’s domicile status because the overseas income is not taxable. In this situation the remittance basis is also irrelevant, such that it makes no difference whether the income is brought into the UK or not.
Where an individual is UK resident, overseas income is generally subject to UK income tax. The manner in which it is taxed depends on the individual’s domicile status. The remittance basis is only available if the individual is neither domiciled nor deemed domiciled in the UK. However, there is an exception to this for individuals who in a tax year, have a deemed UK domicile and have unremitted foreign income and gains of less than £2,000. These individuals can use the remittance basis despite being deemed domiciled.
The importance of an individual’s domicile status – capital gains tax
Individuals are subject to UK capital gains tax if they are either UK resident or temporary non-resident. In addition, an individual who is non-UK resident is subject to capital gains tax on:
Capital gains tax applies to worldwide assets. Once an individual is subject to capital gains tax, as set out above, it is then necessary to consider the person’s domicile status to determine the manner in which gains on overseas assets will be taxed. The remittance basis is only available if the individual is neither domiciled nor deemed domiciled in the UK in the same way as it is for income tax.
The importance of an individual’s domicile status – inheritance tax
An individual’s domicile status determines their liability to UK inheritance tax on overseas assets. Overseas assets are not subject to inheritance tax unless the individual is either domiciled or deemed domiciled in the UK.
We will now look at the new deemed domiciled status rules.
Deemed domicile status – income tax and capital gains tax
Under the new rules, an individual will be deemed domiciled in the UK for the purposes of both income tax and capital gains tax if they are long term residents and/or formerly domiciled residents.
Long term residents – deemed domiciled in the relevant tax year
However, long term residents will not be deemed domiciled if there is no tax year beginning after 5 April 2017 in which they were UK resident.
Accordingly, an individual who would become deemed domiciled as a long term resident, but has not been resident since 6 April 2017 will not actually become deemed domicile unless they become UK resident subsequently.
Formerly domiciled residents – deemed domiciled in the relevant tax year
It should be noted that there is no longer any need for the £90,000 remittance basis charge where an individual has been resident in the UK for 17 of the previous 20 years, as such an individual will now be deemed UK domicile and therefore unable to claim the remittance basis. The remittance basis charges of £30,000 and £60,000 continue to apply.
Deemed domicile status – inheritance tax
As noted above, the concept of deemed domicile is not new to inheritance tax. However, changes have been made to the old rules and a third situation in which formerly domiciled residents will be deemed domiciled in the UK has been introduced.
UK domiciled individuals who leave the UK
The rule relating to UK domiciled individuals who leave the UK and acquire a non-UK domicile has not been changed. Accordingly, after leaving the UK, such individuals are deemed to be UK domiciled for a further three years.
Long term residents
The old rule under which individuals were deemed UK domiciled once they had been resident for 17 out of the last 20 tax years, has been changed.
Under the new rule, individuals are deemed UK domiciled where they:
Note that for income tax and capital gains tax, there is a requirement for a long term resident to be tax resident in the relevant tax year. For inheritance tax the rule is wider in that the individual need only be resident in at least one of the four tax years ending with the relevant tax year.
Formerly domiciled residents
The first three of these conditions are the same as those for income tax and capital gains tax.
For income tax and capital gains tax, formerly domiciled individuals become deemed domiciled from the tax year in which their tax residency resumes. However, for IHT there is a grace period provided that the individual was not UK resident in either of the preceding two tax years. This means that the individual will revert to a deemed UK domicile from the start of the second year of UK tax residency.
The most significant change to corporation tax concerns the relief available in respect of losses carried forward. These changes have been summarised in the TX-UK article. These changes apply to:
In this article, unless otherwise stated, the term ‘losses’ refers to all five categories of deduction listed above.
Three changes have been made:
A question will not be set involving losses carried forward which were created prior to 1 April 2017.
Further rules in respect of trading losses carried forward
Company’s trade becomes small or negligible
If a company’s trade becomes small or negligible in an accounting period in which a trading loss arose or from which a loss is carried forward, trading losses carried forward to future periods can only be offset against future profits of the same trade as opposed to total profits.
If the company’s trade ceases, trading losses cannot be carried forward against any future income.
Candidates are not expected to have knowledge of the effect which a company’s trade becoming small or negligible has on any other types of losses carried forward.
Restriction on the use of losses carried forward
A restriction applies to the use of losses carried forward against total profits in excess of the deductions allowance of £5 million. A company’s profits after deduction of current year reliefs (including group relief) and the deductions allowance can only be reduced by 50% using losses carried forward.
Candidates are only required to have an awareness of this restriction and will not be expected to apply their knowledge to a particular situation.
Group relief and consortium relief
These reliefs are now available for losses carried forward and not just those losses incurred in a corresponding accounting period.
Losses carried forward can only be group relieved if there is an overlapping period during which the two companies are members of the same group relief group. The overlapping period is the period which falls into both of the following periods:
This is similar to the rules in respect of corresponding accounting periods with which you will be familiar.
As noted above, a question will not be set involving losses carried forward which were created prior to 1 April 2017. This means that a question will not be set involving losses carried forward which were created in accounting periods which straddle 1 April 2017.
Q Ltd and R Ltd are members of the same group relief group.
Q Ltd has losses carried forward at the start of its 12-month period ended 31 March 2019.The losses were created in the year ended 31 March 2018.
R Ltd will claim losses from Q Ltd in respect of its nine month period ending 30 September 2019.
The overlapping period is the three months from 1 January 2019 to 31 March 2019. Accordingly, 3/12 of the losses carried forward can be surrendered to R Ltd in respect of its nine month period.
The ability of a company to surrender carried forward losses to other group members is subject to the following restrictions:
Restriction of group relief for losses carried forward
This restriction applies where there has been a change of ownership of a company, A Ltd. A Ltd’s pre-acquisition losses carried forward cannot be surrendered to companies in its new group for a period of five years from the date of the change in ownership.
This restriction operates in one direction only – ie there is no restriction on the transfer of losses carried forward to A Ltd from the companies in its new group. The exceptions to this rule will not be examined.
The situation where the claimant company and/or the surrendering company were owned by a consortium will not be examined.
Restriction following a transfer of trade with common ownership
Where a company sells its trade to another company, any trading losses are transferred with the trade if the same person(s) owned at least 75% of the trade:
A restriction applies in the following circumstances:
For five years after the change in ownership any transferred losses which arose before the change in ownership:
Restriction on carry forward of trading losses – change in ownership of a company
The rules restricting the use of losses following a change in the ownership of a company and a major change in the nature or conduct of its trade have been modified. This modification only applies where both of the changes have occurred on/after 1 April 2017. Changes occurring prior to 1 April 2017 will no longer be examinable.
The modification changes the time period during which the changes must occur in order for the use of losses to be restricted. The period is now a five year period beginning no more than three years prior to the date of the change of ownership.
Restriction on trading losses carried forward – assets transferred between companies
This restriction applies where:
A chargeable gain could be transferred in one of two ways:
The restriction only applies to gains which arise within five years of the date of the change of ownership.
The restriction prevents Q Ltd from relieving the gain using losses carried forward as at the date of the change in ownership.
There is a similar provision which prevents losses carried forward as at the date of the change in ownership being group relieved to Q Ltd.
Enhanced capital allowances
Expenditure on energy saving or environmentally beneficial plant and machinery qualifies for a 100% first year allowance. Where a company has made a loss, it may surrender that part of the loss that relates to such allowances in exchange for a payment from HM Revenue and Customs. Such a claim can only be made where the company is unable to use the losses in the current accounting period against its own profits or via group relief. The claim is made in the company’s corporation tax return.
The amount which the company will receive from HM Revenue and Customs is a percentage of the loss surrendered. This percentage has been reduced from 19% to two-thirds of the corporation tax rate – ie 12.67% (19% x 2/3).
You also need to be aware that the maximum payment which a company can claim is the higher of £250,000 and its total PAYE and NIC liabilities for the relevant accounting period. Where any of the qualifying plant and machinery is sold within four years of the end of the relevant accounting period, there will be a claw-back of an appropriate part of the payment made and a reinstatement of the losses.
Research and development (R&D) expenditure
Large companies which incur qualifying revenue expenditure on R&D are entitled to a tax credit. This credit has been increased from 11% to 12% of the costs incurred.
This tax credit reduces the company’s corporation tax liability. Any excess can be paid to the company up to a maximum of the company’s PAYE/NIC liability in respect of those employees involved in R&D activities for the relevant accounting period. Any remaining credit balance can be carried forward and offset against the company’s corporation tax liability for the next accounting period or any other accounting period or, in the case of a group company, surrendered to another member of the group.
The 12% tax credit is also treated as taxable income, such that it increases the company’s taxable income. For a company which has incurred R&D expenditure of £100,000, the overall effect of the rules is as follows:
|Tax credit deducted from corporation tax liability (£100,000 x 12%)||12,000|
|Corporation tax on additional income (£100,000 x 12% x 19%)||(2,280)|
|Corporation tax saved (9.72% of the expenditure)||9,720|
Substantial shareholding exemption (SSE)
The SSE is given automatically where there is a sale of shares out of a substantial shareholding – ie a holding of at least 10% of the company’s ordinary share capital, and all of the conditions are satisfied. Remember that the sale must be out of a substantial shareholding as opposed to a sale of a substantial shareholding; it is not the percentage of shares sold that is relevant but rather the percentage holding prior to the sale.
The SSE exempts any gain arising on the sale of shares as well as denying relief for any loss. Consequently, it is an important exemption and its availability should be considered before chargeable gains or allowable losses are calculated.
There has been a relaxation of the qualifying conditions:
Disincorporation relief ended on 31 March 2018 and a replacement relief has not been introduced. This topic has therefore been deleted from the syllabus.
The following articles will be published on the ACCA website later this year.
Written by a member of the Advanced Taxation – United Kingdom (ATX-UK) examining team