Tax Update: Prepare for change

From April 2008 new personal tax forms will be different. Barry Robinson says planning ahead is critical.

Barry Robinson.

It's an easy trap to fall into: concentrate on the most pressing issues but, as the saying goes, 'fail to plan, plan to fail'. What am I talking about? Preparing for the new personal tax return that will be issued in April 2008.

Understandably, I hear you say that at this time of year you need to concentrate on submitting the remaining returns, chasing the clients that are habitually late in providing information, and focusing on the 31 January 2008 deadline. In previous years I would have agreed with you but this year is very different. Why? The Carter report.

What the Carter report has done is:

•    introduce new filing deadlines;

•    force agents to file returns electronically;

•    give Revenue & Customs the opportunity to introduce a new-style personal tax return, SA100.

The changes to the new personal tax forms are huge. The main SA100 has been split in two, the SA100 collecting the more common information such as dividends and interest, state benefits and pension payments, with the more complex areas going into an additional information return, SA101. The form has also been simplified, net-tax-gross being replaced, in the main, with just the net figure, and some areas being amalgamated, for example, three different bank interest areas on the current SA100 becoming one box on the new form. And the changes don't stop at the SA100; the supplementary pages have also changed. For example, the information on the current employment pages has been split between the new employment page and additional information return. The share scheme pages have been simplified and, along with last year's new pension page, SA125, have also been incorporated into the additional information return. The reporting requirements for self-employment and capital gains have changed. If you haven't seen the new forms take a look at

The question is, with so many changes, will your review procedures cope? Many practices use software to aid reviewing the return and if your software doesn't, you may want to change.

Do you currently file returns electronically? If you don't you will have to from April 2008, although a recent concession by the Revenue will allow you to submit computer-generated returns on paper up to 31 October. The Carter report removed the ability for tax return compliance software to produce 'substitute' forms, ie, a printed copy of the return. This was intended to force agents to submit returns electronically via filing by internet (FBI). Many agents already do this but if you don't, consider looking at it now. Use the January 2008 deadline as a test bed for FBI on selected clients to assist in defining your processes before you have to use it in earnest. If you leave it too late and your processes fail because you have not planned ahead, you may be forced to file your 2007/08 returns on paper by 31 October. Could you cope with that?

So plan ahead, formulate what you need to do, test your processes and get ready for the changes coming in April 2008. Some say it is as big a change as the introduction of self-assessment itself.

And while you can plan as much as you like, let's hope the Revenue is planning too. There has been much publicity over the years about the instabilities of its filing by internet infrastructure and its failures at busy times. With agents only filing 40% of their 2005/06 SA100 returns electronically, what will happen when the remainder, some 2.7m returns, are also filed in this way?

Barry Robinson is lead product manager at CCH Software. CCH publishes Accountancy.

April action required

Some dates just stick in the mind. Very few of us will forget our own birthday, and if we want a peaceful life, we tend to remember the key birthdays and anniversaries of our close friends and family. For the busy tax adviser one date is absolutely key: 6 April 2008. It is the catalyst date for some of the biggest tax changes of recent years and the implementation date for some significant tax events.

To start off with, unless there is a major about-turn, we will see several key changes coming in for the first time as the result of the pre-Budget report (PBR). There are also a number of important other changes all based around April 2008. Below are my seven 'wonders' of the April tax world:

1. Capital gains tax (CGT). The new rate of 18% will take effect from next April and we lose taper relief and indexation allowances. This means significant business decisions need to be taken between now and the beginning of April primarily by those who are looking to preserve an effective 10% tax rate. We know that the government may offer some relief to those who will be losers from the CGT changes. There has been a well-flagged suggestion of the return of retirement relief (albeit capped at £100,000) but more may come for start-ups and other affected businesses. The draft legislation and hopefully detail on any amendments to the original proposals, is expected this month. This will give just three full months for important decisions to be made.

2. Residence and domicile. The PBR concentrated on the new £30,000 annual 'tax club' for those who are non-domiciled in the UK but have been resident here for seven years or more as at 6 April 2008. This payment will enable them to retain the tax benefits of being non-domiciled. However, much more is expected on such tricky issues as whether the government will extend s86 and s87 (the settlor and capital payments charge) or indeed s13 (taxation of UK-resident participators in non-UK resident companies, which would be close if UK resident). Full details on what exactly will happen is expected in mid-December.

As soon as these details are available, any affected non-domiciled taxpayer will need to consider very carefully what to do next and will almost certainly require specialist help.

3. Income shifting. We used to call it 'income-splitting', but the government has decided we are now in an era of 'shifting' income around. As Accountancy went to press, we are expecting the draft legislation and detailed draft guidance on the rules post the taxpayer's win in Jones v Garnett. It is highly likely we will not like what we see and many owner-managed businesses, both companies and partnerships, will be reviewing the detailed draft examples to determine quite what the effect is to existing structures. Will they need to change, say, a traditional 50:50 dividend split between a higher tax-paying spouse and their basic tax-paying other half? Or will they be comfortable that the facts show the existing balance is commercial? Again, we will only have until the start of April to determine if change is required.

4. Trusts post Finance Act 2006. It is nearly two years ago since the dramatic changes to trusts were brought in by the Finance Act 2006. A transitional period was included within the FA 2006 running up until April 2008 to enable those who had accumulation and maintenance (A&M) trusts prior to 22 March 2006 to take action to mitigate them falling completely into the relevant property regime post 6 April 2008. The time to take rectifying action is, therefore, fast approaching.

In addition, the concessionary transitional serial interest (TSI) rules cease on 5 April 2008. To get into this regime one needs a settlement which commenced before 22 March 2006, and immediately before that date a person needed an interest in possession (IIP). That prior interest must come to an end on or after 22 March, but before 6 April 2008. When it comes to an end, another IIP must arise to which someone is beneficially entitled, and that interest cannot be a disabled person's or bereaved minor's interest. The reason why a TSI is so useful is it effectively extends the old more amenable tax regime.

Combining the above two factors, it can be seen that anyone with a trust arrangement who has not yet reviewed their position has only a few months to determine if any action is necessary.

5. Capital allowances. April 2008 also sees the radical overhaul of the capital allowances regime. There will be a new annual investment allowance for the first £50,000 of expenditure on plant and machinery in the general pool introduced for 2008/09. From April the rate of writing-down allowances for plant and machinery in the general pool will be reduced from 25% to 20% and the rate of writing-down allowances on long-life asset expenditure will increase from 6% to 10%.

On top of this, also from April, writing-down allowances on industrial and agricultural buildings will be gradually phased out, with final withdrawal of both regimes by 2010/11. From 2008/09 the rate of writing-down allowances on certain fixtures integral to a building will be set at 10%.

6. Company cars. From next April, various changes take place to the way company cars are taxed. The government is keen to promote 'greener' fuels and has provided an extra tax-break for those who have cars that can run on E85 fuels. Regulations have now been laid to permit a discount of 2% when calculating the taxable benefit for cars that run on E85 fuels.

Also from 6 April there will be a new low tax rate of just 10% for those cars with carbon dioxide emissions of just 120g/km. These cars are called qualifying low emissions cars (QUALECs). They may lack the 'wow' factor of the more traditional upmarket company car but more car manufacturers are producing vehicles that will run at these low emissions and appeal to a changing consumer market. Reductions for hybrid or bi-fuel cars will not apply to QUALECs but the 3% diesel charge will apply as it does to all cars at present. Cars powered solely by electricity are excluded from these arrangements and retain their net appropriate percentage of 9%.

The appropriate percentage for cars with carbon dioxide emissions of 121g/km and above is unaffected by the introduction of the 10% band mentioned above, but is affected by the reduction in the lower threshold from 140 to 135 g/km. It is therefore getting more difficult to attract the lower car tax rates if you drive a larger vehicle.

Equally the taxpayer who is subject to the car fuel benefit charge will see an increase in 2008/09. The charge is worked out by finding the appropriate percentage for car benefit purposes and applying it to a fixed figure usually known as 'the multiplier'. This figure is increased to £16,900 for 2008/09, increasing from the current £14,400.

7. Tax changes. On top of all the above activity there are significant tax changes from 6 April 2008. Mainstream corporation tax goes down from 30% to 28%. The small companies tax rate climbs another percentage point to 21%.

Meanwhile the basic rate of income tax falls to 20%, but the starting rate disappears for earned income and pensions (although it remains for savings income and capital gains). This coupled with national insurance contribution changes means that those on lower incomes (under around £17,200) are actually worse off if you ignore tax credits.

Putting everything together, April 2008 is probably the biggest date in the tax calendar for years, and for tax advisers a golden opportunity to help clients over the next few months.

Residence and domicile

Two cases concerning residence and domicile have been heard in the last few weeks. Both may become, in part, overtaken by events as the PBR announced changes to the way these rules are to operate, but they are still of interest.

In Gaines-Cooper v HMRC, the High Court considered the taxpayer appeal in the case of Robert Gaines-Cooper. He had argued he was non-domiciled and non-resident in the UK. The special commissioners had disagreed. In particular they found that he had never 'left' the UK and therefore never ceased to be resident here. This case led to a subsequent statement from Revenue & Customs on the general issue of its IR20 guidance in this area (see Brief 1/07).

Mr Gaines-Cooper went on to appeal against the domicile ruling contending that he had made a domicile of choice in the Seychelles. In a hearing on 13 November (see [2007] EWHC 2617 (Ch)) the court held that there was not sufficient evidence to overturn the decision of the tribunal and therefore he lost his appeal.

In Barratt v HMRC, Mr Barratt ran a management service company in the entertainment sector. He argued that he left the UK on 5 April 1998 and remained outside the UK for more than one tax year, returning on 7 April 1999. Unfortunately, the facts did not back up his claim as he had used his debit card on 6 and 7 April in the UK. It did not appear as though he had left the UK for more than occasional residence abroad and was therefore caught by s334, ICTA 1988 and was subject to tax as still resident here.

The special commissioners found in favour of the Revenue in determining that Mr Barratt remained resident in the UK throughout the relevant time period.

Inheritance tax (IHT) nil rate bands

As mentioned in last month's column (see p84), the PBR saw immediate changes to the way that the nil rate band can be shared between married couples and civil partners. This was backdated for widows and widowers. Revenue & Customs has now published nil-rate-band tables for IHT and its predecessor taxes, for all years from August 1914 to the present date.

This means taxpayers and their personal representatives and their advisers can compute how much of a deceased spouse's nil-rate band remains available when the surviving spouse subsequently dies.

National Insurance Bill

The National Insurance Bill 2007 came out in November. Explanatory notes, questions and answers and other papers can be accessed via

The Bill is intended to put into effect government proposals:

•    to allow the upper earnings limit (UEL) for national insurance contributions to be aligned with the higher-rate threshold for income tax from 2009/10; and

•    to bring forward the introduction of the upper accruals point (UAP) for the state second pension and contracted-out rebates to April 2009.

At least this is one change that will not happen from April 2008!

Contributed by Francesca Lagerberg, head of the national tax office at Grant Thornton UK LLP and chairman of the Technical Committee of the ICAEW Tax Faculty.

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