Analysis – A hardening of the Revenue’s attitude.

I’m afraid I’m banging on about taper relief again. If you think the subject a turn-off, please don’t let it be. If you are an owner of a private company or are an employee of a company that has a share schemes, it is – or should be – your number one tax concern. If you are involved in the management of a company (any company, assuming it has an employee share scheme), you should face up to the fact that your shareholders could lose the benefit of the 10% effective CGT rate whenever there is a change either to shareholders’ rights or to the company’s (or its group’s) activities.

And if you are involved with trading activities through a partnership or trust, you will need to know the ropes.

This column is intended as a warning that the Revenue’s attitude to business asset taper relief has hardened significantly since this April saw the top effective rate of 10% on business assets reached after just four years while, for non-business assets, it remained at 24% after ten. With the time and rate differential now so large, perhaps that’s not surprising.

(As my colleague Allan Beardsworth pointed out in this column four weeks ago, even where shares have been held for the full four years, that isn’t the end of it. If they become business assets as a result of the change of rules in April this year, the 10% rate takes 12 years to cut in, and if business assets become non-business assets (perhaps when an employee leaves his job or if a privately-owned company gets a quote) – the 10% rate gradually vanishes, like the grin of the Cheshire cat.)

In refining its views, the Revenue has also, in some cases, overturned the written advice it had given earlier. Altogether, I believe we are seeing more than a few straws in the wind and are witnessing a tougher attitude. Here are some instances:

– it appears the Revenue is setting a higher standard for loan notes issued on a takeover. If they take the form of what is known as non-qualifying corporate bonds, they qualify for taper relief. If they also count as securities, they are treated in the same way as shares, so they are capable of qualifying as business assets. The Revenue appears to be examining more closely whether they really are securities;

– apparently, it no longer accepts that whenever a partner increases his profit share he is merely enhancing his original acquisition of a share in the goodwill and other assets of the firm. This means that whenever a partner joins or leaves, or profit sharing ratios change, there are acquisitions and disposals by each and every partner in the underlying assets. Normally, capital gains tax is not payable till a partner actually leaves, but the complex record-keeping for a medium-sized firm, let alone a large one having constant partner changes, is a frightening prospect;

– it no longer accepts that trustees trading in partnership can get taper relief in any circumstances.

– because the top rate of tax on a dividend is two and a half times greater than it is on a capital gain (25% after the tax credit rather than 10%), there are obvious incentives to go for capital gains instead of dividends – say through share buy-backs. There are signs that the Revenue is making greater use of the ‘dividend-stripping’ anti-avoidance provision (TA 1988 s703) in these sorts of circumstance.

There are some important lessons to be drawn from this new development:

– don’t assume that any liberal interpretation the Revenue has previously applied to the taper rules will necessarily continue (or even that any earlier letter of advice still holds good). Make sure you know the current state of play;

– play safe – see that your shareholders’ get the 10% rate on the worst assumptions;

– put shareholders’ interests to the fore when contemplating any change to their rights or to the company’s activities, and see there is a mechanism for sounding a warning bell before it’s too late;

– don’t overlook the need to get a clearance from the Revenue on the dividend-stripping legislation;

– and finally, don’t despair – there are occasions where a potential loss of relief can be staunched or even recovered.

– Maurice Parry-Wingfield, tax director, Deloitte & Touche. [HH] Checklist.

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