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Mark McLaughlin CTA (Fellow) ATT TEP comments on HMRC's proposals to simplify the tax system, with emphasis on the rules for associated companies.

Mark McLaughlin

Introduction

The Government appears committed to simplifying the tax legislation. A document released following the Pre-Budget Report 2007 (‘Tax Simplification Reviews’) (see http://www.hm-treasury.gov.uk/pbr_csr/documents/pbr_csr07_tax.cfm) confirmed the Government’s commitment to making the tax system fairer, simpler and more efficient by “modernising and simplifying both the personal and business tax systems”. For practitioners who own copies of the Yellow and Orange Tax Handbooks for 2007-08 (or equivalent), this policy will doubtless be warmly welcomed!

In addition, certain measures were announced in the Pre-Budget Report 2007, which should have the effect of reducing tax compliance and administration. These include an increase in the threshold below which payments on account are not required under income tax self-assessment (see TMA 1970, s 59A(1)(c)), from £500 to £1,000, albeit not until 6 April 2009. There is also to be an increase in the turnover threshold for three-line accounts in the self-employment supplementary pages of the personal tax return, from £15,000 to £30,000, and the introduction of shorter self-employment pages for businesses below the VAT registration threshold. The benefit of an increase in the three-line accounts threshold in practice remains to be seen, with some practitioners preferring not to use the facility. Their concern is that doing so increases the possibility of enquiry by HM Revenue & Customs (HMRC).

Consultations

The Government is consulting on other areas of tax simplification as well. One such consultation is on removing the £8,500 a year threshold at which most benefits-in-kind become payable. The rationale behind this proposal is apparently to make it simpler for employers when reporting benefits. On the face of it, the only simplification would be to dispense with one end of year return (form P9D) in favour of another return (form P11D) for the same employee. However, there is to be a further consultation on “how best to collect tax on benefits in kind and expenses through the payroll, helping up to 500,000 employers by removing the need for a separate end of year process”. Whether this consultation signals the end of form P11D as well remains to be seen.

As part of the simplification process, the Government is launching three initial reviews, covering the following areas:

• how to simplify VAT rules and administration in the UK and the EU;
• how anti-avoidance legislation can best meet the aims of simplicity and revenue protection; and
• how to simplify the corporation tax rules for related companies.

Associated companies

‘Related companies’ in the above context includes groups and associated companies. The ‘Tax Simplification Reviews’ document highlights four specific areas where simplification is considered to be of most significance to UK companies:

• group aspects of corporation tax on chargeable gains;
• associated company rules for the small companies corporation tax rate;
• Corporation Tax Self Assessment (CTSA) filing and payment arrangements for groups; and
• further reductions in the administrative burden of transfer pricing rules.

The review that will perhaps be of most interest to the majority of practitioners is of the associated companies rules, which is an everyday consideration for many who deal with family and owner-managed companies. It is rather a pity that the review on this issue comes at a time when the gap between the small and main companies’ rates of corporation tax is narrowing. From 1 April 2008, the main rate will be 28%, while from 1 April 2009 the small companies’ rate increases to 22%.

Business partners

The focus of this aspect of the review appears to be on business partners. For the purposes of determining if companies are under common control, the rights of associates are attributed to the shareholder (TA 1988, s 416(6)). An ‘associate’ includes a business partner (s 417(3)(a)). The ‘Tax Simplification Reviews’ document states:   

“…when associated company rules were introduced, partnerships were limited in size and the administrative burden of establishing the number of associated companies controlled by business partners was not great. Limits on the size of partnerships have now been lifted and partnerships can be very much larger than was previously the case. The Government believes there may be scope for simplification of the associated company rules as they apply to the small companies rate.”

A review of this aspect of the associated companies rules was perhaps prompted by two particular problems caused by partnerships. Firstly, the legislation was originally drafted before the concept of film partnerships. Technically, partners in a film partnership are associated with each other. HMRC have previously pursued this point, notwithstanding that in many cases it would be virtually impossible to accurately determine the number of associated companies of any particular film partner. Secondly, some partnerships (professional ones in particular, such as accountants) have a large number of partners. A similar problem therefore exists as for film partnerships, in terms of counting the number of associated companies in each case.

Under Extra Statutory Concession C9, HMRC do not treat associated companies as such in certain situations. For example, an ‘associate’ also includes a ‘relative’, which is defined in TA 1988, s 417(4) as a “…spouse (or civil partner), parent or remoter forebear, child or remoter issue, or brother or sister”. Concession C9 provides that relatives other than spouses (and civil partners) and minor children are not treated as relatives for the purposes of the associated companies rules, but only in respect of companies if there is no ‘substantial commercial interdependence’ between them. The associated companies rules could be simplified by different methods, such as one of the following:

• removing business partners from the definition of ‘associate’ completely; or
• only removing partners of partnerships above a certain, predefined number; or
• by HMRC extending Concession C9 to exclude business partners if there is no substantial commercial interdependence between the companies they control.

The first alternative would clearly be more straightforward than the others in practical terms. However, whether this change takes place will probably depend on the Government’s degree of concern that business partners may somehow use such a relaxation to manipulate the associated companies rules.

Businesses, practitioners and other interested parties are invited to submit their views on this and other issues by post or e-mail, or by completing a survey. Details can be accessed via the HM Treasury website: (http://www.hm-treasury.gov.uk/pbr_csr/documents/pbr_csr07_tax.cfm).

Practitioners who feel that the associated companies rules are unduly complicated therefore have the opportunity to at least have their say, if not to influence how the rules are simplified in the future. The same applies to the other simplification ‘targets’ listed above.

The above article was first published in Busy Practitioner (November 2007).