6 July 2007

Business tax briefing

Finance Bill progress The position on enactment of the Bill is unchanged from that reported last week. The Lords stages are (provisionally) scheduled for Tuesday 17 July. Assuming this date remains unchanged, Royal Assent could be any day from then (including 17 July) up to the start of the recess (26 July).

Treasury team confirmed The Treasury team has now been confirmed as follows: Chancellor of the Exchequer: Rt Hon MP; Chief Secretary to the Treasury: Rt Hon Andy Burnham MP; Financial Secretary to the Treasury: Rt Hon Jane Kennedy MP; Exchequer Secretary: MP; Economic Secretary: Kitty Ussher MP. As will be apparent, the Treasury has been restructured. A detailed breakdown of responsibilities within the Treasury is still awaited.

Treasury Select Committee Enquiry into Private Equity: final meeting The House of Commons Treasury Select Committee has held the final day of its enquiry into Private Equity. A number of additional witnesses from Private Equity firms gave evidence meeting on 3 July. The additional witnesses are from Blackstone, CVC Capital Partners, Duke Street Capital and Alchemy. Other witnesses were Sir David Walker, who was appointed in March to formulate a code of conduct for the private equity industry and improve disclosure levels, and the Financial Services Authority. See http://tinyurl.com/2vrhbz for the terms of reference. In a recent interview with the , on the question of Private Equity and taxation, the new Chancellor, Alastair Darling, said that Government should be ‘very, very wary indeed of a knee-jerk reaction or a reaction to a day’s headlines into making a tax change that could result in unintended consequences and sometimes undesirable consequences.’ Mr Darling said that any changes would have to be made at the proper time, in the context of the Budget or the PBR, and of tax reform. He also said that there had been a number of examples where private equity has benefited companies, and stressed the need to look at all the evidence.

Statutory sick pay: agency workers on fixed term contracts: HMRC guidance The Court of Appeal has upheld the High Court decision in HMRC v Thorn Baker Ltd that an agency worker on a fixed term contract of less than three months was not entitled to statutory sick pay. The ruling applies to agency workers only. Other short-term contract workers are unaffected and remain entitled to statutory sick pay. HMRC have issued a note reminding agencies that their workers can become entitled to statutory sick pay if in a single contract: • they work longer than the original period specified and the total period actually worked exceeds three months; or • the contract is extended for more than three months. Agency workers whose contracts are for three months or less can also become entitled to SSP if two or more such contracts with the same agency are separated by eight weeks or less (56 days) and: • the total length of the contracts is more than 13 weeks • the total period actually worked becomes more than 13 weeks or • the contracts are extended so that together they can run for more than 13 weeks. Government is considering the implications of the ruling, and it may well be that legislative change is being contemplated. The full text of HMRC's note can be accessed at http://tinyurl.com/344jko

CT relief for pension contributions: controlling directors HMRC's online Business Income Manual has been updated at BIM 47106 'specific deductions: staffing costs: remuneration to friends and relatives: wholly and exclusively'. The opening paragraph of this section now reads as follows: Audit. Tax. Consulting. Corporate Finance.

'Controlling directors are often the driving force behind the company. Where the controlling director is also the person whose work generates the company's income then the level of the remuneration package is a commercial decision and it is unlikely that there will be a non-business purpose for the level of the remuneration package. It should be noted that remuneration does not include entitlement to dividends etc arising in the capacity of shareholder.' This suggests that, in most cases, pension contributions paid by a company on behalf of a controlling director who generates the company's income will satisfy the wholly and exclusively test, without reference to a separate test of the value of the work undertaken on behalf of the company. This does not necessarily mean that any amount of pension contribution in respect of an owner-manager will always be allowable.

ECJ decision on Danish implementation of Mergers Directive The ECJ has given its judgment in a case which involved the application of the EC Mergers Directive, specifically the definition of ‘cash payment’ and the potential application of the anti-abuse provision to deny an exemption from tax where an exchange of shares is followed by a profit distribution in a short period of time. The Danish National Court asked the ECJ: • whether or not a dividend such as the one paid must be included in the calculation of the cash payment provided for in the Directive. The Danish tax authorities took the view that the distribution had to be regarded as forming part of the exchange of shares, with the result that the maximum threshold of 10% of the nominal value of the securities issued in exchange had been exceeded, thereby denying the availability of the exemption available under the Directive. • whether the tax authorities could react to a possible abuse of rights, even though the national legislature has not enacted specifically to incorporate Article 11 of the Mergers Directive into domestic law. (Article 11 provides that Member States may refuse to give the benefit of the Directive, inter alia, where the exchange of shares has tax evasion or tax avoidance as its principal objective or as one of its principal objectives). The ECJ ruled that the dividend should not be included in the calculation of the ‘cash payment’ provided for in Article 2(d) and that there was therefore an ‘exchange of shares’ within the meaning of the Directive. Consequently, such an exchange of shares would be tax–free, unless the Danish rules on abuse of rights, tax evasion etc could be interpreted in accordance with Article 11, so as to justify the taxation of the share exchange. It was for the national court to ascertain whether this was the case. (Kofoed. Case C-321/05).

National Audit Office Report on accuracy in processing income tax According to a National Audit Report published this week, errors in processing by HMRC lead to the wrong amount of tax being paid by around 1 million taxpayers during 2006/07. Errors resulted in an estimated £225 million of tax underpayments, and £157 million in overpayments. Recommendations include: HMRC developing an early warning system for emerging processing problems; separating out more complex cases for processing; developing staff training; and strengthening the help available for taxpayers affected.

Treaty clearance process for payments of interest; thin cap agreements The Budget included an announcement that the Government had agreed that HMRC could expedite its procedures for agreeing relief from UK tax on loan interest paid to non-residents and extend the circumstances in which UK residents can enter into thin capitalisation agreements. The scope for making thin capitalisation agreements between HMRC and a UK borrower will be extended to enable more businesses to obtain certainty about the tax consequences of particular financing arrangements by means of unilateral advanced pricing agreements (APAs) under the existing legislation. These will be administered under the terms of a new Statement of Practice which has been issued in draft. See http://tinyurl.com/2xlwc7 The aim is to replicate HMRC current practice in thin capitalisation cases within the APA framework. Comments on the draft Statement of Practice are invited by 27 July 2007. We shall be attending a meeting with HMRC on 25 July to discuss the draft Statement. If there are any points you’d like raised, contact

Michael Gordon-Brown [email protected] or Nick Greenhouse [email protected]

This Briefing is prepared by Deloitte & Touche LLP, a limited liability partnership. For further information on any of these developments, please ask your usual Deloitte contact. Business Tax Briefing is designed to keep readers abreast of current developments, but it is a general guide only and is not intended to be a comprehensive statement of the law. No liability is accepted for the opinions it contains, or for any errors or omissions. © Deloitte & Touche LLP 2007. All rights reserved.