Consultations and other publications

Simplification review - corporation tax calculations and returns for smaller companies

Budget 2008 announced a review to consider whether it is possible to simplify corporation tax calculations and statutory return obligations for smaller companies. 

Discussions with business and tax professionals have highlighted a number of ways in which the present arrangements for compliance might be simplified, but some have been ruled out on the grounds that the changes would not meet the Government’s fairness objective.

The two areas which HM Treasury and HMRC are considering further are:

  • unifying statutory accounts reporting and tax calculation obligations for smaller companies thus removing the need for a company to prepare a separate tax computation
  • more radically, designing an optional new tax regime for the smallest of companies based more on cash flow rather than accounting profits.

However, both suggestions raise many issues that require further detailed consideration. In addition, recent EU proposals on allowing member states to vary accounting requirements for ‘micro’ companies from accounting directives must also be taken into account.

Next steps

The Government invite comments by 20 February 2009 from interested parties and will also consider any other ideas suggested by business and tax professionals.

The Enterprise Investment Scheme (EIS) – consultation update

In March 2008 the Government issued a consultation paper on EIS. A number of questions were posed in connection with four broad areas:

  • promotion of the scheme
  • regulatory burdens
  • how the rules impact on companies receiving EIS investment
  • simplification of administration.

The responses can be summarised as follows:

Overall, EIS is regarded as effective at encouraging investment in smaller, high risk, and growing businesses. There is a generally good level of awareness of the scheme, although rules imposed by the FSA are seen as an obstacle in raising finance under EIS.

The advance assurance mechanism, which enables companies to ascertain from HMRC whether they are satisfied that the company will be regarded as carrying on a qualifying trade, is regarded as beneficial, and HMRC staff dealing with these are regarded as helpful.

Certain types of trade, predominantly those that carry on activities that are asset backed, are not qualifying activities for EIS purposes. A review will be conducted, with particular attention to the definition of relevant intangible assets, which is regarded by respondents as too restrictive.

Under current rules, 80 per cent of money raised from EIS subscriptions must be used within one year, and the remaining 20 per cent within two years. This is regarded as restrictive for businesses with a longer development cycle. It is now proposed that the limit should be changed to require 100 per cent of the money raised to be used within two years.

There was some comment on whether the required three year holding requirement is necessary. However, HMRC has indicated that there is unlikely to be any change to this.

Accidental breaches that give rise to a withdrawal of relief are, according to HMRC, rare. Consequently there are unlikely to be changes to the rules in this respect.

Currently there is a restricted facility to carry back an investment to the previous year. It is proposed that this facility will be enhanced, enabling carry back up to the annual investment limit, currently £500,000.

Comments were received seeking a relaxation to the connected parties rules, that prevent, for example, employees from claiming EIS relief. As the relief is intended to encourage external investors, the connected party rules are unlikely to change.

Under current rules, where an investor lends money to an EIS company, and subsequently converts the loan to share capital, EIS relief is not available as no new money has been introduced into the company. This prohibition is to continue, despite representations that this rule is too restrictive.

The consultation has demonstrated the effectiveness of EIS relief as a method of encouraging investment in smaller higher risk companies.

Next steps

The Government will continue to consult informally and changes will be proposed in future Finance Acts.

Payments, Repayments and Debt – consultation document November 2008

Following consultation on a programme designed to help taxpayers meet their liabilities and HMRC to improve its collection unpaid tax.  HMRC proposes to proceed with a form of a payment instalment scheme.  Following on from earlier consultations, the scheme would allow those who are eligible to pay their liabilities under the scheme to make monthly payments to cover their liability.  HMRC consider that the scheme is suitable for persons within the income tax and corporation tax Self-Assessment regime.  If the agreed payments are not made, this should result in removal from the scheme and a return to the normal course of collection.  

The scheme is intended to be voluntary and to allow taxpayers some variations in their monthly payments to reflect seasonal cash flow.  However, the intention is that any outstanding liabilities must be paid within a reasonable period. 

Next steps

A further consultation period will run until 13 February 2009.


Interest – working towards a harmonised regime

In a consultation document in June 2008, HMRC proposed harmonising the rate of interest charged across all taxes.  As a consequence of responses to that document, HMRC will be publishing draft legislation to charge simple interest on late payments and pay simple interest on over-payments across all taxes.  However, HMRC intend to maintain the current interest regime for Quarterly Instalment Payments for large companies.

Next steps

Following on from the response to the earlier consultation, HMRC is seeking views on their proposal to adopt the Bank of England base rate as the starting point for calculating the interest rate.  HMRC also intends to have differential rates for charging and paying interest and, again, are seeking views on this proposal.   The consultation period will run up to 13 February 2009.


Consultation document: modernising powers, deterrents and safeguards

Finance Act 2008 introduced an aligned framework across the main taxes (income tax, capital gains tax, corporate tax and VAT) to enable HMRC to check whether taxpayers are correctly calculating their tax liabilities. In addition, time limits for claims have also been aligned.

A further consultation document has now been issued to seek views on whether it would be appropriate to extend the compliance checking framework and its associated safeguards beyond the main taxes, to include the following:

  • Environmental taxes
  • Insurance premium tax
  • Stamp Duty Land Tax and Stamp Duty Reserve Tax (SDRT)
  • Inheritance tax (IHT)
  • Petroleum revenue tax (PRT)

Whilst the new framework could be applied to these other taxes with only minor changes, there are some aspects which would need to be modified to be fully effective, such as whether record keeping requirements could be introduced for IHT, PRT and SDRT and aligning the time limits in FA 2008.

Another consultation regarding the obligations to file returns and pay tax on time has also been issued with proposals to make taxpayers subject to civil penalties if they do not meet their filing and payment deadlines.  Key proposals include more accessible mechanisms for the payment of tax, and removing penalties for late payment where a taxpayer keeps to their payment schedule under a payment instalment scheme.  Suggested safeguards include a right of appeal to an independent Tribunal against all penalties, and a common legislative definition of ‘reasonable excuse’.

Next steps

HMRC welcomes any comments on the above to be received by 13 February 2009.