Section 107 Finance Act 2007

HMRC have published draft legislation amending Finance Act 2007 section 107.  This was the legislation that dis applies section 32 (1) (c) of the Limitation Act 1980 in tax cases and was found to be contrary to EU law by the Supreme Court in Franked Investment Income Group Litigation v CIR[2012] UKSC 19

 

The legislation is altered so that the restriction of 32 (1) (c) does not apply to actions to recover tax paid contrary to EU law and this will have retrospective effect.

As section 107 only applies to actions brought before 8 September 2003 this will have limited impact.  But the CJEU has also decided that section 320 Finance Act 2004 that applies to claims made after 8 September is also contrary to EU law.  I wonder if this gives life insurance companies any scope to add years to a FII claim.   Paragraph 255 of the judgement of Mr Justice Henderson in Prudential Assurance Co Ltd & anr v Commissioners for HMRC reads as follows:

 

" If, however, the section (320 Finance Act 2004) is invalid, the question arises whether it is open to PHL to pursue any claims in respect of payments of tax made by it before 14 July 1998. In principle, it seems to me that the answer to this question is Yes, because there would then be nothing to prevent PHL from relying on the extended limitation period for

mistake based claims in section 32(1)(c) of the Limitation Act 1980. I do not understand the Revenue to argue that PHL could with reasonable diligence have discovered its mistake before 14 July 1998. In practice, therefore, I can see no obstacle to PHL pursuing its mistake based claims for periods before July 1998, always assuming that section 320 is invalid."

 

Which is interesting.

Link to the draft new section 107 below 

 

http://www.hmrc.gov.uk/drafts/time-limit-eu-cases.htm

The new Common Reporting Standard for automatic exchange of information in tax matters

The OECD published a Common Reporting Standard for automatic exchange of information in tax matters on the 13th February.  The report can be found here:

OECD Information Exchange

I haven't read the report but it seems to be closely allied to the Model 1 IGA approach under FATCA, but  designed for everybody, and I have seen a comment that given the deferral of FATCA implementation FATCA may eventually be subsumed by the OECD standard.

A couple of commentaries on the report that you might like to look at:

From KPMG :

KPMG OECD Exchange

And, in the interests of balance the Tax justice Network:

http://www.taxjustice.netOECD Exchange

Interest Rates on beneficial loans

Just something that caught my eye: no insurance specific consequences.

The interest rate that needs to be paid on beneficial loans to avoid a taxable benefit arising is 3.25% for the fiscal year 2014  - 2015; the rate has been at 4.00% for the last four years.

See the link below:

http://www.hmrc.gov.uk/rates/interest-beneficial.htm

Bond Funds Update

An update to my post of 4th February on offshore bonds. I had a chat with someone who knows a great deal more than I do about the correct interpretation of tax legislation.

Their view was that although on a "strict"reading of CTA 2009 sections 490 and 465 it would appear that a dividend from an offshore bond fund is not taxable it is very unlikely that the courts would apply such a strict reading.  Instead they would look to adopt a more purposive approach that would arrive at what the courts and tribunals are likely to regard as the correct position: that is that such dividends are taxable within the loan relationship legislation.  Perhaps on the basis that the dividends are not distributions as per CTA 2010 section 1000.

So, unfortunately perhaps, this is probably more of a curio than a substantive point.

Capital Gains Tax Matching

I find the the application of the detailed CGT matching rules for life insurance companies a very complicated area.  Having, hopefully, got it straight in my head I'm setting out the position for future reference.

In calculating capital gains tax for the purposes of corporation tax for equities it is necessary to apply pooling as per TCGA 1992 section 104 but with special rules for same day transactions (TCGA s 105) and for instances where there is a disposal and there has been an acquisition in the previous nine days (TCGA s 107).  The important point to note about 107 is that it doesn't catch bed and breakfasting transactions, that is 107 (3) applies where "a number of securities are acquired and subsequently a number of securities disposed of" (My emphasis)

These rules apply to all securities, so include assets subject to deemed disposal.  (Although presumably they don't apply to the deemed disposal itself; although quite why this is the case not so clear.) 

However, there are anti - bed breakfasting rules that only apply to life companies (TCGA 210 B): There used to be anti bed and breakfasting rules applying to all companies in section 106 but these have been repealed.

TCGA s 210 B uses the same 10 / 9 day period as section 107 but also applies where the disposal precedes the acquisition.  The rules only apply where the disposal and acquisition are in respect of the same FA 2012 s 119 holding (i.e the same 440 box in old money).

The rules only apply where the transaction gives rise to a capital loss.

Section 212 assets are not included in the 210B matching rules, as they are  subject to a deemed disposal.

There is a exception for transactions designed to re - balance linked funds but the wording of this section, 210 B (7), isn't, in my opinion, very clear. 

This creates a rather messy two stage process when a company disposes of an equity that is pooled per TCGA 104.

Step 1 Do the calculation using the standard matching rules in section 105 and 107.

Step 2 If step 1 was a loss and the asset and transaction are within section 210B then re do the calculation this time using the matching rules in 210B.

This requires matching as follows:

Same day matching

Matching with acquisitions in the previous 9 days, which is pretty much section 107 matching, but, for reasons that are unclear, with a subtle difference in the order of matching where there is more than 1 such acquisition:  (107 is FIFO i.e. match earlier acquisitions before later ones, 210B is LIFO)

Matching with acquisitions in the 9 days after the sale (i.e. the bed and breakfasting rules).  Where there is more than one sale acquisitions are matched with earlier disposals before later disposals.

Other than as a crude revenue raiser its hard to see any justification for TCGA 210B: CGT loss relief is archaic in the degree of restriction of relief and its only reasonable that life insurance companies use bed and breakfasting to manage the incidence of tax on gains and losses.  In general this will be for the befit of policyholders. 

There is some guidance on the matching rules in LAM 4.A 296.

LAM

ABI Guide to Good Practice In Unit Pricing

I received an interesting update from ILAG on the ABI's "A guide to good practice in the pricing of unit linked funds". As per my post of 5th November the ABI is to revise the Guide to take account of issues arising from the PRAs thematic review of unit pricing.

The ABI is coordinating its response with other industry bodies, including ILAG.  A consultation period will commence in early March and will run for four weeks.  So I would guess the revised Guide should be published late April / early May.   I will provide updates if I hear any more on this.

Prudential Portfolio Dividends

Both sides in the in the Prudential Portfolio Dividends case have been given permission to appeal the High Court decision.  If you follow the link below there's a bit more detail.  If I'm reading this correctly; although the question of exemption vs underlying relief at nominal rate vs underlying relief at actual rate only is going to the Court of Appeal, the High Court is retaining control of  the "computational issues", i.e. if you use a nominal rate then how, exactly does that work in practice.  I think this is a good thing as it cuts down HMRC's scope to constantly litigate on points of detail.

Also the Joseph Hage Aaronson site is a very well set out summary of high profile ongoing tax cases and it includes an update on the The Trustees of the BT Pension Scheme v HMRC [2014] EWCA Civ 23, which I have posted on.  The site is

http://www.jha.com/uk/

And finally a bit of in blog advertising: my post of 4th February on offshore bond funds is, in my opinion, worth five minutes of your time.

Offshore Bond Funds

I wanted to follow up on my post of 22 January on the draft finance bill clauses dealing with the bond fund regime.

What I’m interested in is the correct treatment of an offshore fund that is over 60% invested in loan relationships? (described in what follows as an offshore bond fund)  My concern is with the existing legislation and not the changes. 

It was always my understanding of the legislation that distributions from an offshore bond fund received by a company were taxable as loan relationship credits by virtue of CTA 2009 490 and CTA 2009 307 3 (a). 

CTA 2009 490 (4) excludes from the loan relationship legislation distributions, other than interest distributions, from an AIF, but that does not include an offshore fund (because it’s not an AIF).

Taxing bond fund distributions under the loan relationship legislation seems sensible and is in line with HMRC’s guidance in CFM 43050 that  says;

“ Interest distributions made by an AIF to a company unit holder whose holding is treated as a loan relationship are brought in to account when they are due and payable but no other distributions of an AIF are to be taken into account. This is because the corporate streaming rules already bring into corporation tax relevant amounts of dividend distributions from UK authorised funds.
Otherwise, all income (my italics) arising from a corporate holding in a unit trust, offshore fund or OEIC that is treated as a creditor relationship will be regarded as a loan relationship credit or debit as well as the relevant and the fair value movement in the value of the holding.”

But I'm wondering whether HMRC and I have got this right?  What seems to cause a problem is CTA 2009 section 465 (1).  This reads:

“Credits or debits relating to any amount falling, when paid, to be treated as a distribution must not be brought into account for the purposes of this Part (i.e. loan relationships), except, in the case of credits, so far as they are avoidance arrangement amounts (see subsection (4)).”

The wording here is not clear, but I would read it as saying that distributions cannot be taxed under the loan relationship regime.  CTA 2009 465 (3) then excludes from 465 (1) certain distributions that are taxable as loan relationships but the list does not include distributions paid by offshore bond funds .  

So whilst common sense might dictate that offshore bond fund distributions be taxed under the loan relationship legislation the strict wording of the legislation is, in my opinion, that such amounts are exempt. 

Bond fund distributions are, however, excluded from 465 (1), in 465 (3) of the draft changes to the legislation so this potential issue only arises pre - Finance Bill 2014..

It would be interesting to know  whether life insurance companies are taking this point up with HMRC and whether HMRC have made any comments during the bond fund consultation process.