Tax Case BT Pension Scheme

Just a very quick update on this.  The judgement has now been published

http://www.tribunals.gov.uk/financeandtax/Documents/decisions/the_trustees_of_BT_pension_scheme_v_hmrc.pdf

HMRC VAT brief

On the 17th April HMRC issued a VAT brief on the FSA's Retail Distribution Review and the treatment of 'consultancy charges' for services supplied to employers.  It concerns the application of the insurance exemption in connection with advice offered by employee benefit consultants.

The brief can be viewed here http://www.hmrc.gov.uk/briefs/vat/brief0913.htm

UK / Switzerland Double Taxation Agreement

I have a life insurance client that has Swiss equity investments that are linked to its pension business liabilities.  The client's claim for the 0% rate of withholding available to UK pension schemes receiving dividends from companies resident in Switzerland under the UK Swiss double taxation treaty was rejected by the Swiss authorities  The client pointed out that this situation was specifically covered in the memorandum of understanding between the UK and Switzerland dated 12 February 2008 .

It's quite hard to find this on the web so I have included a link below

https://docs.google.com/file/d/0B2l-XIOPFJ-2TkFiS2xhNDhWV2c/edit?usp=sharing

You might think that the memorandum makes it entirely clear that linked pension business should obtain the 0% rate but the Swiss authorities are apparently still disputing the claim.  If anybody else is having similar problems and would like to get in touch with my client than please drop me a line.

richard.bentley@bentleyforbesconsulting.co.uk

Rebate of management fees

The taxation of the rebates referable to BLAGAB paid by the manager of an AIF to a life insurance company has always struck me as unfair. Rebates are typically paid where an insurer invests in a retail share class that has a relatively high level of charges and the rebate is a  discount recognising that the life insurance company is an institutional investor and that a retail level of charge is not appropriate.  

I think it is generally accepted that such rebates are taxable in the life insurers I-E tax computation as FA 2012 section 92 (Formerly FA 89 section 85) applies.  But if the rebate is being made by an AIF investing in equities then the management fee has not obtained tax relief as the AIF will not have (significant) taxable income.  Accordingly, it seems inappropriate that the life company should have to tax the rebate in its I-E computation.

If an AIF offers an institutional share class as well as a retail share class then it would, all other things being equal, be sensible for the life company to invest in the institutional share class.  To illustrate the point say there were two equity AIF share classes identical in every way except that one charged 2% per annum and the other 1% per annum and the high charging fund would pay a rebate of 1% to large investors such as life insurers.

Assuming a 3% yield in the AIFs the low charging fund would pay a non taxable dividend of 2% (yield of 3% less 1% management charge).  The high charging fund would pay a tax free dividend of 1% (3% yield  - 2% management charge) and a 1% rebate that would be taxable - but really shouldn't be.

Another option for life insurers might be the use of the proposed contractual scheme for collective investment (i.e. UK transparent funds http://www.hmrc.gov.uk/drafts/csci.htm).  I think HMRC sees these as being primarily of interest for pension schemes but they might also be of use to life insurers with BLAGAB business currently in AIFs.

Obviously it is not always possible for a life insurance company to invest in an institutional share class or transparent fund  so it would seem appropriate to provide relief for rebates from equity AIFs in the legislation.  However, there might be practical issues around the drafting of any exemption.

One Source and Capital Allowances

I've been completing my first 2012 computation for submission to HMRC.  One point to note is the way that OneSource deals with capital allowances.  At the foot of the capital allowances computation (schedule C6 in the computation I have been working on) there are two boxes to set the parameters for the WDA rate.  The first of these is a default rate set to 20% and the second is an "over - ride" rate.  If you leave OneSource as is it will use the default 20% rate to calculate capital allowances.  However, for an accounting period 1 January 2012 - 31 December 2012 the correct rate for writing down allowances is 18.49%. 

http://www.hmrc.gov.uk/budget-updates/autumn-tax/tiin1310.pdf)

To change the default rate to 18.49% you will need to enter this in to the "over - ride" cell.

US Double Taxation Convention: definition of “pension scheme”

Following the US Double Taxation Convention of 2001 HMRC entered into a competent authority agreement with the IRS to give an expanded definition of “pension scheme” for treaty benefits under Article 10(3)(b) (Dividends), notably to include unit linked pension policies.  The text of this agreement can be hard to find.  It is at http://www.irs.gov/pub/irs-utl/competent_authority.pdf on the IRS website and at http://www.hmrc.gov.uk/manuals/dtmanual/dt19939zd.htm on the HMRC website.

New annual premium limit of £3,600 for qualifying life insurance policies

The £3,600 annual premium limit for qualifying policies took effect on 6 April 2013. HMRC have issued guidance in the form of FAQs aimed at people who have a qualifying policy or are thinking of taking one out.
 

The FAQs are at http://www.hmrc.gov.uk/news/life-insurance-policies-faqs.pdf.

See Naples

No posting from me next week as I'm in sunny (I hope) Italy.  Philip may be posting.  If you want email alerts on when something has been posted on the blog enter your details in the top right hand corner of the page.

Investment funds and life insurance policies: commission payments to investors

HMRC have issued Brief 04/13 which explains their view on the tax treatment of commission passed on by an intermediary to individual investors in investment funds and life insurance policies.

HMRC regard these amounts as annual payments.  Therefore they are subject to deduction of tax at source unless the payments are retained within an ISA or SIPP account.

In the past such payments were often assumed to be not taxable.  HMRC acknowledge that they have not challenged this approach in the past and may possibly have given unclear advice, leading to a practice of non-taxation in the hands of investors.  HMRC will therefore not seek to collect tax for earlier years from either payers of commission or individual investors.  However, payments made from 6 April 2013 must be treated correctly.

HMRC recognise that deduction of tax may initially involve manual calculations with some approximation. They will accept an approximation of the tax deducted at source up to the end of the calendar year 2013 providing that this is as accurate as reasonably possible and that the payer makes arrangements to update systems by the end of 2013.

The Brief contains links to a technical note and draft guidance.  The draft guidance includes commentary on the tax treatment of adviser charges.

The Brief can be found at http://www.hmrc.gov.uk/briefs/income-tax/brief0413.htm.

Carry on Streaming

The authorised investment funds regulations in Statutory instrument 2006/964 are a good example of the perils of secondary legislation.  The regulations are changed frequently and at times without proper consideration of all of the ramifications a change will have - on two separate occasions the regulations have been inadvertently changed so as to prevent life assurance companies from streaming AIF dividends.

The second time this happened amending legislation was introduced by SI 2012 / 3043 and I have been looking at these amendments.  Fortunately the revisions do what was intended.  As before regulation 48 (2A) states that streaming does not apply to distributions to which "Chapter 2 of Part 3 of CTA 2009 applies" i.e. a dividend included in a trading profits computation.  However, a new regulation 48 (2A) (a) goes on to say,  "unless the dividend distribution is made to an insurance company in respect of any non-BLAGAB long-term business carried on by it"  (There is a similar provision for insurance special purpose vehicles.)

Accordingly, if a life insurance company receives a dividend attributable to its pension business then although the dividend is taxable in a trading profits computation (FA 2012 section 111) it will be streamed between UFII, FII and foreign income with the income tax deemed to be deducted from the UFII offset against the company's liability to corporation tax or repaid.  This ensures that when a life insurance company invests pension policyholder funds in, for instance, an  AIF investing in property (i.e. old style fund not a PAIF) it will be able to recover any corporation tax paid within the AIF.  This of course is the "right" result, as these are pension investments, it would  be inappropriate for there to be tax payable in the AIF that could not be recovered.

For BLAGAB business streaming should also apply as a trading profits basis of taxation is replaced by the I-E basis for BLAGAB (FA 2012 s68).  There is, perhaps, a slight ambiguity here as FA 2012 136 talks about a BLAGAB trade profit being the profit if the BLAGAB business were assessed on a trading profit basis but to my mind still pretty clear that streaming should apply.

For general insurance business dividends are not included in a trading profits computation (CTA 2009 130 (2)) so streaming of dividends should also apply here.

One other point I noticed whilst writing the above is that the definition of "C" i.e. the taxable income constituent in the UFII calculation in SI 2006/964 49 (2) has changed.  It is as before income in the AIF subject to tax less the net liability to corporation tax but now there is also a deduction for 

" any amount carried forward from an earlier accounting period and allowed as a deduction in computing the legal owner’s liability to corporation tax for the accounting period in which the last day of the distribution period falls"

I think the intention here is to prevent the deduction or offset of income tax deemed to be deducted from the UFII stream of an AIF dividend if the AIF itself has not paid tax.  That is say that you had a taxable AIF investing in property that for some reason had brought forward losses.  The AIF might use those losses to reduce its taxable income to nil and then pay a dividend.  Under the old streaming rules the dividend would be 100% UFII (as all of the income of the period is taxable).  If the dividend was received by a life insurer and referable to pension business then the insurance company would be able to reclaim or offset the income tax deemed to have been deducted on the UFII.  So a tax "credit" is created where no tax has been paid.  Under the new rules the unfranked percentage in the above example would be 0% as the taxable income "C" would be reduced by the tax losses utilised.  So counter intuitively a dividend from a property AIF would all be treated as "franked".

OEIC/unit trust distribution vouchers: scope for confusion?

Dividend distribution vouchers from authorised investment funds are still being issued containing information about the fund’s net liability to corporation tax.  This seems to be a legacy of the old restriction on repayment of income tax which was specifically repealed with effect for distributions made at or after 1.45 p.m. on 22 June 2010 22 June 2010.  Under the current rules the unfranked element in each distribution is allocated between a UK element and a foreign element (if any).  Deemed income tax attributable to the UK element is creditable with no restriction on repayment.  Therefore information about the fund’s net liability to corporation tax is irrelevant and may serve only to confuse.

Tax Case BT Pension Scheme

There has been an upper Tribunal decision in BT Pension Scheme v Revenue and Customs Commissioners [2013] UKUT 0105 (TC) 

This is of interest as the case has parallels with the FII GLO cases; in this instance it concerns a pension scheme trying to claim back tax credits on foreign dividends and FIDs. The Upper Tribunal dismissed appeals from both the tax payer and HMRC; so the position is that it is discrimination under article 56 of the EC treaty not to pay tax credits to a pension scheme in respect of FID and overseas dividends but the time limit in TMA 70 section 43 applies to any claim for repayment.  The case is summarized in CCH tax news 108. I haven't been able to find a publicly accessible copy of the decision.