Investment capital vehicles
The Chancellor announced proposals for the introduction of new investment capital vehicles. The proposals are not specific and will be the subject of consultation. However it is likely that the resulting measures will make it possible for the Government to provide cheap loans to investors and to guarantee the personal backing of investors in certain target industries or class of company.
It is not clear how long it will be before these vehicles come into existence, but it is likely that they will be of significant interest to smaller businesses, owner managed businesses, entrepreneurial investors and developing industries.
Treasury Shares – removal of advantage to VCTs
Following the Companies (Acquisition of Own shares) (Treasury Shares) Regulations 2003 the Finance Bill contains consequential tax changes which come into effect on a day yet to be appointed.
The new company law rules will allow companies to purchase their own shares, hold them and sell them back to the market. Previously companies buying their own shares had to cancel them, other than in certain limited circumstances. However the new rules will allow existing shares to be held ‘in treasury’ as though they do not exist and to be sold back to the market at a later date. Such shares will be treated as if they are ‘new shares’ being issued when they are taken from treasury. For tax purposes however, such shares will be treated as cancelled.
Individuals investing in small companies through Venture Capital Trusts (VCTs) can take advantage of income tax relief on their investment when investing in new shares. The tax measures announced will prevent shares coming out of treasury as being ‘new shares’ for these purposes, and thereby prevent them from qualifying for VCT purposes.
Anti-avoidance measure for ‘relevant discounted securities’
Following the introduction of the relevant discounted securities (RDS) rules in the Finance Act 1996 there have been anti-avoidance measures introduced in both 1999 and 2002. These have been further extended to prevent the exploitation by individuals and partnerships of income tax loss relief on RDSs.
An RDS is a security carrying a higher amount payable on redemption than the issue price, with a difference of more than 0.5% a year. Profits on RDSs are taxed as income, and until 27 March 2003 (the date the measure was announced), losses were relieved when the security was transferred or redeemed.
It is intended that RDSs are now to be taxed in the same way as interest bearing securities, in that profits on transfer or redemption will remain taxed as income but loss relief will no longer be available for income tax purposes. Deductions for incidental expenses have also been withdrawn. The new rules also apply to trustees, pension funds and charities. In addition, trustees, who could previously carry forward RDS losses, will no longer be able to do so.
Existing RDSs listed on a recognised stock exchange are to be subject to a grandfathering rule, so loss relief and deduction of expenses will remain available.
Loan relationships and derivative contracts
New measures are to be brought in which close some loopholes in the loan relationship rules and derivative contracts rules. The old rules provided some scope for intra-group transfers of loan relationships and derivative contracts to bring about tax savings in certain circumstances.
In particular the possibility for profits to fall out of charge where the mark to market basis is used has been closed off, as has the possibility to take an allowable deduction in respect of interest which is, in fact, never paid.
Also it will become possible for the accounts treatment for exchange gains and losses to be followed and the treatment for intra-group novations will be clarified. Exactly how this is done will reveal whether there are any planning points to watch out for, but anyone currently taking advantage of the old wording will need to rethink their approach.
Sale and repurchase agreements (Repos)
The Budget announced that new anti-avoidance measures are to be introduced in relation to sale and repurchase agreements.
The view of the Revenue is that the ‘repo’ rules currently operate inconsistently so that some repo transactions are subject to only some, but not all of the repo tax rules and that these mismatches have been exploited for avoidance. The changes are designed to ensure that where a transaction is treated as a repo for tax purposes, all the repo tax provisions will apply and where some rules are disapplied, they all are.
The changes will also extend existing anti-avoidance rules which counter schemes where there is no provision for a manufactured payment between the parties and the repo seller allows the repo buyer simply to retain the dividend paid on shares as his return on the deal to cases where the repo buyer receives a manufactured dividend rather than a real dividend.
A new provision will also be introduced to “provide a clear scheme for dealing with foreign exchange gains and losses arising on the original sale price in a repo”. The Finance Bill does this by operating the repo rules only on the price differential, without any effect of exchange movements on the original sale price. Exchange movements on the original sale price are brought within the loan relationship rules.
There rules will in general only apply to contracts made on or after 9 April 2003, except for the change in relation to manufactured dividends, which will apply to manufactured payments made on or after 9 April 2003 pursuant to existing contracts.