Compiled by Chris Greene of Rawlinson & Hunter and Christina Maddalena
Pension Schemes Office updates

Revision of overseas transfers practice (Update 82). The Pensions Schemes Office (PSO) will no longer require all transfers to overseas schemes to be reported. The PSO's prior consent will still be required where, at the date of the transfer request, the transferee is a controlling director or a high earner. In other cases the transfer may be made without prior consent provided all the conditions in A and D.I of Appendix VI, or in A and D.I of Appendix 22 to IR 76 (2000) are met.

The evidence must be kept for six years and the PSO will carry out sample checking to test that the conditions are being met. If it is found that there has been a failure to meet the conditions and the administrators/trustees have not checked sufficiently before allowing the transfer, tax approval could be withdrawn from the transferor scheme from the date of the transfer.

There are two main changes to the transfer conditions. First, the overseas scheme's rules will no longer have to be examined. Instead the over-seas scheme will need to be authorised/ recognised as a pension scheme in the country in which it is established and must be able to accept the transfer. Second, a contribution will not have to be made to the overseas scheme before the transfer is made.

The new practice will apply to transfer requests to administrators/trustees, insurance companies, and personal pension and retirement annuity contract providers made on or after 6 April 2001.

The PSO has revised PN 10.39 and Appendix VI, which provide guidance on occupational pension schemes. Note, however, that the above does not apply to transfers of contracted-out rights and safeguarded rights, which have to meet the requirements of DSS regulations.

Large self-administered schemes winding up without replacement - actuarial valuation reports (Update 83). Actuarial valuation reports in the prescribed manner are not required for a scheme where the valuation regulations apply is being wound up and not replaced. This relaxation is permitted provided the winding-up is completed within two years. Not all schemes are able to wind up within this period, however.

In such circumstances the scheme will receive a valuation report reminder. From 22 January 2001 the PSO will consider requests that a report need not be submitted if the delays in winding up are for reasons beyond the scheme's control. The PSO will consider each case on its merits, and the update includes examples of what the PSO will consider acceptable or unacceptable reasons for the delay.

Transfers to personal pension schemes (Update 85). New regulations are to be introduced shortly to revise those governing transfers from occupational pension schemes to personal pension schemes to take account of new and amending legislation governing stakeholder pensions, pension sharing on divorce and income withdrawal.

The update publishes the Appendix, which becomes part of the Practice Notes IR 12 (1997) from 22 January 2001.

The version of the practice notes on the Revenue's website has been updated and the new pages are attached to the paper version of the update. These can be viewed at

Stakeholder pensions

The regulations setting out the tax framework for the new stakeholder pension schemes have been finalised. The scheme comes into effect from 6 April 2001.

The new regulations simplify the process of transfer payments. The restrictions on lump sum transfers will now apply only to controlling directors and to those who are aged 45 or more, whose earnings also exceed the maximum amount of earnings from which pensions contributions can be made. The number of transfers subject to a new valuation test is also reduced. In addition, the regulations accommodate pension sharing on divorce and allow funds in income drawdown to be transferred.

The Personal Pension Schemes (Transfer Payment) Regulations - SI 2001//119, replace earlier regulations that limit the amount of money that can be transferred from an occupational pension scheme or an equivalent statutory scheme to a personal pension scheme. The regulations also restrict the amount of the transfer that may be paid as a lump sum when benefits are taken or on death.

The Personal Pension Schemes (Conversion of Retirement Benefit Schemes) Regulations - SI 2001/118, set out the rules governing occupational money purchase schemes that wish to convert their tax approval to the new tax regime. The schemes must ensure that the benefits of any members who are controlling directors, or aged 45 and earning over the earnings cap, should be checked against the maximum transfer payment allowed under the transfer regulations. The use of funds relating to controlling directors will also be limited. Converting schemes will not be able to pay a lump sum to controlling directors that exceeds that which would have been payable if the scheme had not converted. Similarly, if the controlling director dies before taking benefits, only 25% of the fund may be taken as a lump sum.

The Personal Pension Schemes (Restriction on Discretion to Approve) (Permitted Investments) Regulations - SI 2001/117, specify the parameters of personal pension scheme investments and also include the definition of the new individual pension account (IPA). The regulations bring the existing Inland Revenue guidance notes (IR76) on investments by personal pension schemes within a statutory framework. The regulations allow personal pension schemes to invest in any assets except assets owned by the members, and most residential property. The regulations also allow self-invested personal pensions to invest in a wide range of assets from equities to commercial property.

Official rate of interest

The official rate of interest applying to beneficial loans to employees by reason of their employment is to remain unchanged at 6.25% for the 2001/02 tax year. This follows the new approach that the official rate will be set in advance for the whole of the following tax year.

Employees earning £8,500 a year or more (including the value of benefits in kind) and directors are taxable on the benefits they receive by reason of their employment.

If the benefit in kind is a loan bearing a preferential rate of interest, tax is chargeable on the difference between the interest paid by the employee, if any, and the interest that would have been paid on the loan at the 'official rate' of interest.

Farming losses

A new temporary extra-statutory concession has been introduced that relaxes the rule restricting relief for farming losses where there have been losses for more than five years.

For the tax years 2000/01 and 2001/02 only relief for unincorporated farmers that incur six consecutive years of income tax farming losses - or six or seven in 2001/02 - will continue to be available against other income and capital gains provided that the six or seven-year period is immediately preceded by one year of profit.

In addition, there must be at least one other year of profit in the three years immediately preceding that one year of profit.

This means that if a farmer had six loss-making years from 1995/96 to 2000/01, but a year of profit in 1994/95, and at least one year of profit in 1991/92, 1992/93 or 1993/94, then sideways relief would continue to be available in 2000/01. Similarly, if the loss-making years continued into 2001/02, sideways relief will still be available if the conditions are met.

For incorporated farmers, the same relaxation will apply if the conditions are satisfied in the accounting period ending in the years to 31 March 2001 or 31 March 2002.

Investment managers and overseas clients

The Inland Revenue has published Statement of Practice SP 1/01, The Treatment of Investment Managers and their Overseas Clients, which gives detailed guidance on how the Revenue will apply the rules in FA 1995 regarding the assessment of UK investment managers who act on behalf of overseas clients.

The broad effect of the 1995 legislation is to ensure that non-residents (excluding certain non-resident trustees) are not exposed to any additional liability to tax by using the services of independent investment managers in the UK. This is done by restricting the tax chargeable on the non-residents' income in respect of investment transactions carried out through independent UK investment managers. The tax is restricted to the tax, if any, deducted at source. The provisions do not apply to income from, or connected with, a trade carried on in the UK by the non-resident other than through a broker or independent investment manager.

In some cases, the non-resident appoints an investment manager overseas who in turn appoints a UK investment manager - often its affiliate - to manage the investment of all or part of the portfolio. In these circumstances, the legislation is applied as between UK manager and the non-resident on the basis of looking through the overseas manager. The fee income retained by the overseas investment manager should do no more than reflect the work carried out offshore.

Section 127, FA 1995 applies only to an investment manager who is carrying on the trade of a non-resident client in the UK. If the non-resident is not trading in the UK, then the investment manager cannot be the non-resident's 'UK representative' within s 126, FA 1995, and cannot be assessed. If the transactions carried out through the investment manager are part of the trade carried on by the non-resident then, unless s 127's conditions are satisfied, the income from that trade, including any profit from the realisation of securities, is taxable. Whether or not a taxpayer is trading is a question of fact to be determined by reference to all the particular case's facts and circumstances.

In determining the question of trading, any transactions carried out through an investment manager are to be considered in the context of the non-resident's status and worldwide activities. An individual is unlikely to be regarded as trading as a result of a purely speculative transaction. For a company, a transaction will generally be either trading or capital in nature.

If a non-resident company's main business is a trade outside the financial areas, or an investment holding business, the activities in the UK would normally amount to trading only if they constituted or were part of a separate financial trade.

But if, exceptionally, activities that are an integral part of a non-financial trade's profit-earning activities are carried out through a UK investment manager, then that might amount to trading in the UK. The active management of an investment portfolio of shares, bonds and money market instruments does not normally constitute a trade, but each case will depend on its particular facts. Where futures and options are concerned, SP14/91 will be applied to non-resident clients that are collective investment vehicles, pension funds and other bodies that either do not trade, or whose principal trade is outside the financial area.

If a non-resident carries on a financial trade outside the UK, any transactions carried out through a UK investment manager are likely to amount to trading in the UK. The criteria for deciding whether a non-resident financial company is an investment company or a trading company are the same as those applying to a resident company.

Where there is trading in the UK, no assessment is due on the investment manager if s 127's provisions are satisfied, and similarly no assessment is due on the non-resident. Liability is instead limited to tax deducted at source. Section 127 applies only where two tests are met: the independence test and the 20% rule.

The investment manager must act for the non-resident in an independent capacity. The Revenue will regard this independence test as satisfied where any of the following apply: the provision of services to the non-resident and persons connected with the non-resident is not a substantial part of the investment management business; from the start of a new investment management business provided the above condition was satisfied within 18 months; an intention to satisfy either of the above conditions was not met for reasons outside the manager's control, although reasonable attempts to fulfil that intention were taken; investment management services are provided to a collective fund, the interests in which are quoted on a recognised stock exchange or otherwise freely marketed; and investment management services are provided to a widely-held collective fund.

The first of these situations would be satisfied where that part did not exceed 70% of the investment management business, either by reference to fees or to some other more appropriate measure.

Where investment management services are provided to a collective investment scheme constituted as a partnership, participants in the scheme would not be regarded as connected persons for this purpose solely by reason of membership of the partnership.

The last of the conditions is likely to apply main-ly to overseas funds that are not treated as transparent for UK income tax purposes. The condition will be regarded as satisfied if either no majority interest in the fund was held by five or fewer persons and persons connected with them, or no interest of more than 20% was held by a single person and persons connected with that person.

The above list is not exhaustive, and cases that fall outside the specified categories will be determined on their facts.

The essence of the 20% rule is that the investment manager and persons connected with him must not have a beneficial entitlement to more than 20% of the non-resident's taxable income arising from transactions carried out through the investment manager.

Professional fees, including performance-related fees, paid to the investment manager and persons connected with him, are not included in the 20% provided that they are allowable as deductions in arriving at taxable income.

Where the 20% threshold is broken, that part of the non-resident's income, which the investment manager and connected persons are beneficially entitled to, is excluded from the limitation of charge.

The 20% rule is treated as satisfied throughout any period, not exceeding five years, for which it is met in respect of the total taxable income of the period arising from transactions carried out through the investment manager. It is also treated as met if the manager intended to meet the condition but failed to do so, wholly or partly, for reasons outside the manager's control, having taken reasonable steps to fulfil the condition.

Where the investment management services are provided to a collective investment scheme, the 20% rule is applied by looking at the scheme as a whole rather than at the individual participators.

Where the 20% test is failed as a consequence of aggregating the manager's income with that of certain partners who are not connected persons otherwise than as a result of s 839(4), the failure will be regarded as a failure under s 127(4)(b) to fulfil an intention to satisfy the test.

In certain circumstances, that failure will be considered as attributable to matters outside the control of the manager and persons connected with him and not as a result of a failure to take reasonable steps to ensure the condition was met. In such situations the 20% test will therefore be passed.

The legislation will be applied in this way where the connected persons are partners other than solely in a fund under consideration, and partnership is the only reason that the manager is connected with them. The 20% rule will not apply where an overseas pension fund trustee is connected to the UK investment manager, as the trustees have only legal rather than beneficial ownership of the pension fund income.

Where the question of control of a company within s 416(2), TA 1988 is in issue, in determining whether parties are connected, the power to appoint the majority of the board of directors will not of itself usually be regarded as constituting control of a company's affairs unless the board exercises powers that would normally be exercised by the shareholders at a general meeting.

The statement emphasises that the independence and 20% tests are applied quite separately, and provides two illustrations of the point. It also clarifies the interaction of FA 1995 and extra-statutory concession B40.

Savings income

Regulations have been made setting out the detailed arrangements for implementing the new improved reporting regime for savings income announced in FA 2000, which take effect in April 2001.

The regulations set out detailed rules relating to changes made in the light of consultation with the main representative bodies of the financial institutions affected. They also introduce consequential changes to existing regulations applying to the bank and building society tax deduction and information reporting regimes, and update these in order to allow various forms and certificates to be provided electronically.

In addition to regulations on information reporting, two further regulations have been made that relate to the repeal of the paying and collecting agents' regime. These regulations are Income Tax (Manufactured Overseas Dividends) Amendment Regulations - SI 2001/403 , the Income Tax (Building Societies) (Dividends and Interest) (Amendment) Regulations - SI 2001/404 , the Income Tax (Interest Payments) (Information Powers) (Amendment) Regulations - SI 2001/405 and the Income Tax (Deposit-takers) (Interest Payments) (Amendment) Regulations - SI 2001/406.

Under the new arrangements, the requirement under s 17, TMA 1970 to automatically report payments of interest to non-residents will now apply only to interest paid to individuals.

Guidance notes for operating the new reporting arrangements are available at www.inland

Stamp duty and stamp duty reserve tax

The Stamp Duty and Stamp Duty Reserve Tax (Investment Exchanges and Clearing Houses) (The London Stock Exchange) Regulations SI 2001/255 took effect on 26 February. They rule out multiple charges to stamp duty or stamp duty reserve tax that might have resulted from transactions in securities on the London Stock Exchange.

The regulations exempt from stamp duty or stamp duty reserve tax transfers of equity securities or agreements to transfer equity securities to the London Clearing House Ltd (or its nominee) in its capacity as a person providing clearing services in connection with transactions made on the London Stock Exchange.

Similar regulations are already in place in relation to Tradepoint, Liffe, the OM London Exchange and Jiway.

Voluntary arrangements

The Revenue and Customs are seeking views from those with an interest in voluntary arrangements following the proposal last November to form a new joint unit, the Voluntary Arrangements Service (VAS).

The revenue departments would welcome views on the proposals to consider voluntary arrangements in a similar way to commercial creditors.

The VAS also welcomes views on the proposal to create a user forum for insolvency practitioners and other interested parties. The initial terms of reference for this forum currently include: the development of a framework for good voluntary arrangement practice within which the VAS can work; assisting with evolving policy and the dissemination of best practice; identifying the best ways to serve all interested parties; enabling stakeholders to inform the target-setting process and to measure with the VAS the effectiveness of its performance; and developing ways to improve efficiency and effectiveness by making negotiations as meaningful and targeted as possible.

Both departments are particularly keen to hear from parties interested in representing members of the user forum. Comments and ideas should be sent to Keith Stockman, Voluntary Arrangements Service, Durrington Bridge House, Barrington Road, Worthing, West Sussex BN12 4SE or emailed to Inland Revenue interpretations

The following items were first published in the Inland Revenue's Tax Bulletin, Issue 51. The Revenue will normally apply the interpretations of law as stated, subject to the caveats that: each case depends on its particular facts; the Board may find it necessary to argue for a different interpretation in appeal proceedings; and the Board's view of the law may change.

Delaware limited liability companies (DLLCs).

In response to a number of enquiries, the Revenue has set out its views on whether US LLCs generally and DLLCs in particular may be regarded as issuing 'ordinary share capital' for the purposes of s 838, TA 1988 and ss 135,136, and 170-181, TCGA 1992.

The Revenue understands that there is legal authority for DLLCs to issue 'shares' under s 18-702c, Delaware Limited Liability Act. This provides that 'a limited liability company agreement may provide that a member's interest in a limited liability company may be evidenced by a certificate of limited liability company interest issued by the limited liability company'.

If a DLLC issues 'shares' in this way, the Revenue will accept that these may be regarded as 'ordinary share capital' for the purposes of s 838, TA 1988. Consequently, such a company may be a '75% subsidiary' for the purposes of s 838(1)(b), TA 1988. It follows that a DLLC may be: a member of a capital gains tax group, ss 170-181, TCGA 1992; party to share exchanges, ss 135-136, TCGA 1992; and a member of the same group as another company for the purposes of group relief, ss 402-413, TA 1988.

It should be noted that not all DLLCs issue shares, and the particular terms by which the DLLC has been created must be taken into account. In doubtful cases, the Revenue will advise in line with Code of Practice 10.

The contact point is Ben Newton, Inland Revenue Policy, Business Tax, Group Relief and Losses, Room 97, New Wing, Somerset House, London WC2R 1LB.

Waste site preparation expenditure. The Revenue has clarified the distinction it makes between the capital costs of engineering a site to receive waste and the revenue costs of creating internal cells.

Engineering a modern waste disposal site to the point where waste can be deposited often includes constructing an impermeable clay layer, or laying an artificial lining, across the base and sides of the site. When the site has eventually been filled, these elements, together with the final capping, create a containment structure for the whole site that is likely to fulfil that function for decades. In the Revenue's opinion, the costs of creating such a containment structure are capital in nature.

For practical and financial reasons, the base and sides of site containment structures are often built in sections, with internal barriers, or 'bunds', on the open sides to create the first level of internal cells.

Provided these internal cells are filled and sealed within two years, the Revenue accepts that the costs of the internal earthworks, ie, the 'bunds', and any internal caps are revenue expenditure. However, the costs of the base and sides, which form part of the containment structure, remain capital expenditure.

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