Budget 2000

United Kingdom

At least Mr Brown seems to have avoided a Lawson style inflationary tax give away! Unfortunately that may be the best that can be said about a fairly dull Budget. On the positive side we should be alright for replacement hips on the NHS. On the debit side expected stamp duty rises on property were not accompanied by the hoped for abolition of or reduction in stamp duty on shares (odd for a Chancellor who is already paranoid about Euro withholding tax on bonds) and the inevitable relaxation of group relief rules was accompanied by the unexpected and unpleasant removal of the mixer company, double tax advantages and CFC rule tightening.

And this year’s cliche? Watch out for any provisions which “frees up companies to make decisions about investment and structure for commercial rather than tax reasons”. They are sure to be tax raising and could well lead to the very flight of capital from the UK that Gordon Brown fears!

We look below at, and comment in a little more detail upon a number of measures announced in the Budget.


A number of important changes to the taxation of groups have been announced which will have important implications for the structuring of groups where one or more group members are non-UK resident and for inward investment into the UK by non-UK resident companies.

Group and Consortium Relief

Currently, group and consortium relief is only available where a group or consortium consists only of UK companies. The decision of the European Court of Justice in ICI v Colmer made it clear that the UK provisions were in breach of the EC Treaty which prohibits member states from imposing restrictions on the freedom of establishment of nationals of one member state in the territory of another. The Government has however gone further than is necessary to implement the decision in ICI v Colmer so that with effect from 1st April 2000 UK groups and consortia may be established through companies resident anywhere in the world. Further, UK branches of overseas companies will be entitled to claim losses surrendered by other UK companies in the group and be entitled to surrender branch losses where those losses cannot be relieved (other than against profits within the charge to UK corporation tax) in the overseas country.

Capital Gains

Also from 1st April 2000 the requirement that the principal company in a capital gains group must be UK resident will fall away. Under the new rules, a capital asset may be transferred between companies within a mixed resident group on a no gain, no loss basis provided that the capital asset transferred remains within the scope of corporation tax on chargeable gains.

New rules will also be introduced to facilitate the offset of capital profits and losses arising within a group. Currently, groups achieve this by routing disposals of high value capital assets through a single group company; group relief is available for trading losses but not for capital losses. With effect from 1st April 2000 groups will be able to elect to treat an asset as having been sold by a specified company within the group without having to actually transfer the asset.

Rollover Relief for Companies/Corporate Venturing

A consultation on the proposal for companies to rollover gains on the sale of “substantial shareholdings” (around 30%) was announced. The inclusion of shares on the list of assets qualifying for business rollover relief would be a welcome measure.

Similarly, the introduction of the corporate venturing scheme with a number of relaxations as compared to the rules as originally proposed is welcome. However, the rules are far from straightforward and it would not be surprising if large companies fail to make use of the scheme. If the Government are determined to make corporate venturing work it may well be the case that future budgets will have to make amendments to the scheme to make it more attractive.

Controlled Foreign Companies (CFCs)

The Government has shown its willingness to take steps to protect what it sees as a “fair UK tax take” by introducing amendments to the existing CFC regime. The proposal to extend the scope of CFCs to tax haven based intra-group service companies is perhaps the first step towards a recognition that the Government will need to be fleet of foot to capture its fair share of tax in the modern e-commerce environment.

It is also noteworthy that two party joint ventures where each party has at least a 40% stake in the joint venture company and one of the persons is resident in the UK will now be caught within the CFC regime in addition to the situations where the CFC is controlled as to more than 50% in the UK.

Elsewhere the CFC changes are aimed at tax avoidance situations such as the use of designer rate regimes and taking advantage of the current loose definition of holding companies.

In the context of this tightening up it is not unsurprising that the Government press releases stress that those not seeking to carry out tax avoidance will still have available to them the commercial motive exemption from the CFC rules. However, it is equally unsurprising that the Inland Revenue is amending its guidance on the motive exemption as it fears that certain clever tax avoiders are abusing that exemption. Although this may be a reflection of the lack of success that the tax authorities have had in recent times in the courts, surely even the Inland Revenue could not fail to win a case against a taxpayer whose main motive is tax avoidance but who claims it is the opposite!

Mixer Companies

It is common for large multi-nationals to have within the group an overseas “mixer” company, typically, established in the Netherlands. This mixer acts as a conduit through which dividends from non-UK group companies can be channelled and paid to the UK parent as a dividend from a single source. Double tax relief is available for the underlying tax suffered by the sub-subsidiary companies allowing the UK parent to benefit from a single blended rate. The new rules, which will apply to dividends paid on or after 1st July 2000, will cap the UK double taxation relief on the underlying rate of tax to 30%. This rate will apply to each tier where a dividend is paid up through a chain of group companies.


The changes to the rules on group and consortium relief and capital gains are welcome and will introduce a degree of flexibility for multi-national groups. In particular:-

Multi-nationals have hitherto been advised to hold shares in a UK subsidiary through a UK holding company where loss relief has been important even though a disposal of the UK subsidiary by the UK holding company would trigger a tax liability on any gain arising. This will not now be necessary. For example, a US holding company establishing subsidiaries in the UK may now establish a Netherlands’ or tax haven holding company to hold the UK subsidiaries preserving the availability of group relief between the subsidiaries whilst avoiding any UK tax on any gain arising from a disposal of the UK subsidiary.

Given that the UK CFC rules still do not extend to capital gains the use of an intermediate non-UK holding company to hold subsidiaries, particularly, non-core, could save UK tax on disposal.

Joint ventures where one or more joint venture partners are non-UK resident are often set up so that the foreign venturer holds shares in the joint venture company through a UK holding company in order to preserve the availability of consortium relief for the UK venturers. This will no longer be necessary. The new rules will permit grouping between a UK branch of an overseas company and a UK company in the group. This may be of particular significance to banks and insurance companies where for non-tax reasons it is common for businesses to be conducted through a branch rather than a subsidiary. For instance, finance lessors will be looking to work out their carry forward UK branch losses, eg arising from sovereign debt, by buying tax positive lease portfolios so that they can do real finance leasing in UK special purpose vehicles and access the tax capacity of their UK banking arms.

The attack on the use of mixer companies was unexpected and will significantly affect the large multi-national groups that use mixers. It is likely that the Government will be lobbied in an attempt to persuade the Government to drop the new proposed rules. However, it must be assumed that the new rules will be implemented and affected groups should therefore consider taking advantage of the delayed implementation of the rules to repatriate profits to the UK before 1st July in order to get the benefit of the old rules. Mixer companies will nevertheless still have a role to play particularly with the group and consortium relief and capital gains changes which allow the use of a non-UK holding company for inward investment into the UK without any attendant tax disadvantages.

The announcement makes the point that the group and consortium relief and capital gains changes will only take effect from 1st April 2000. However, it should be noted that the new rules implement in part the European Court of Justice decisions in ICI v Colmer and Compagnie de Saint Gobain and as such, at least where the non-UK resident parent is an EU/EEA resident the benefit of these rules ought to be available to taxpayers even before 1st April 2000.


Stamp Duty

The ritual of a stamp duty increase in a Gordon Brown Budget took place on Tuesday. The rates of stamp duty were increased to 3% for sales of property (other than shares) above £250,000 and to 4% for sales above £500,000. The 0.5% rate on transfers of shares remains the same and an exemption is introduced for transfers of intellectual property rights. The new rates will apply to transfers executed on or after 28th March 2000 unless the transfer is executed in pursuance of a contract made on or before 21st March 2000 (in which case the old rates will apply). However, unlike in previous years it seems that these transitional rules are more strict so that the old rates will not be available for pre-22nd March contracts assigned after 21st March and completed on or after 28th March. Nor will the old rates apply to pre-22nd March contracts where there is a sub-sale after 21st March (unless completed before 29th March). The Stamp Office apparently accept that (as in previous years) a conditional contract is a contract that attracts the benefit of the transitional rules. The new rates and transitional provisions apply equally to lease premiums.

As foreshadowed in Gordon Brown’s November pre-Budget Report, a number of anti-avoidance rules are to be introduced. It was also announced that legislation will be introduced to permit the introduction of further anti-avoidance legislation at any time obviating the need to wait for the annual Budget and Finance Act to counter new schemes. This acknowledges that as the rate of stamp duty continues to increase, taxpayers will become more determined to find a way of avoiding or reducing its impact.

Anti-avoidance measures

Two sets of measures will be introduced and will apply to documents executed on or after 28th March:-

- The first measure outlaws an aggressive scheme under which, typically, gilts might be sold in return for property and a cash balancing sum. By structuring the exchange as a sale of the gilts, the transfer of the property would (it was argued) not attract stamp duty. The new provisions will not however affect property swaps (see below).

- The second measure counteracts a scheme which involves the transfer of property to a connected company in return for the issue of, say, one share where there are already, say, 1,000 shares in issue. Stamp duty would be payable on the transfer of the property by reference to the value of the one share, which in this example, would amount to approximately 1/1000th of the value of the property. Now market value will be implied.

In addition, with effect from enactment of the Finance Act (likely to be the end of July), the following will be introduced:

- A radical measure to combat the scheme under which leasehold and freehold interests in a property are created so that the valuable leasehold interest could be surrendered by operation of law avoiding a document and therefore stamp duty. The new rules will require the statutory declaration (or other evidence) that must be submitted to the Land Registry to extinguish a leasehold interest to be treated as a deed of surrender and subject to stamp duty. This amendment attacks the fundamental principle that stamp duty is tax on documents effecting transactions and not a tax on transactions. It is noteworthy that the statutory declaration is only usually made by solicitors and not the relevant parties and that leases of under 21 years are not registrable. Subject to the precise wording of the legislation, variations on a stamp duty saving theme may remain available.

- Measures to tighten the stamp duty grouping rules on corporation tax lines to prevent the creation of phantom stamp duty groups which take advantage of the relief for transfers between group companies.

Schemes that the Budget has not (yet) attacked

- The sale of a company rather than the property, paying stamp duty at 0.5% on the sale of shares in a UK company or 0% on the sale of shares in an offshore company.

The property can be transferred into a special purpose vehicle prior to sale relying on the stamp duty relief for intra-group transfers. Where this is not available because the anti-avoidance provisions relating to that relief apply (eg a purchaser has been identified) the property might alternatively be transferred into a special purpose vehicle relying on the stamp duty provisions permitting a reduction in the rate of duty to 0.5% in the case of contributions of an “undertaking” to a company in return for shares. Although an anti-avoidance provision in relation to this relief is to be introduced this appears to be specifically targeted at the use of redeemable shares and therefore this technique may still be possible by using ordinary or preference shares. There has been some concern that the transfer of an investment property does not amount to a “undertaking” and therefore the relief is not available. The better view is thought to be that property is indeed capable in appropriate cases of constituting an undertaking and it is implicit from the very recently issued Stamp Office Manual (paragraph 6.198) and the Budget proposal to deny this relief where redeemable shares are issued that it is also the view of the Stamp Office.

- Split beneficial and legal ownership under which a property is acquired in such a way that the legal and beneficial ownership is split between two companies with the legal ownership preferably vested in an offshore special purpose company. This may also be achieved with existing property holdings. This provides a purchaser with the opportunity of avoiding stamp duty by selling the beneficial interest through an offshore contract. By mitigating stamp duty for the purchaser, this could provide the seller with justification for an increased price or, pending sale, an increased valuation.

- Property swaps - these can be structured in appropriate cases to save duty on the less valuable property. The Budget pronouncements specifically confirm that the existing position on property swaps will be preserved.

- Buy the land first and build the building later thereby avoiding duty on the building costs. Again, specific confirmation has been given that this will continue to be available.

- Partnership - the sale of a partnership interest (rather than the property) may avoid stamp duty. More interest in this technique is likely to materialise following the latest round of increases and the new anti-avoidance measures.

- Rest on contract - stamp duty is not payable on the contract and the legal title is left with the seller. This will not often be appropriate in arm’s length cases but it is certainly a possibility between friendly parties or in the context of joint ventures.

Whilst the Chancellor has taken the opportunity to halt certain stamp duty avoidance techniques there are still opportunities available. It is particularly noteworthy that he has not sought to introduce legislation that counteracts the use of corporate vehicles to package property. However, it should be borne in mind that he has reserved the right to introduce anti-avoidance measures between budgets so that he can run faster to curb revenue loss.

Construction Industry Scheme

The recently implemented Construction Industry Scheme has proved to be a considerable burden particularly to small business. The Government have announced that they will be commencing a period of consultation through a newly appointed Joint Working Group. The consultation will look at how the burden can be lightened without significant loss of revenue. This is an opportunity for a proper review of how the new scheme has been operating in practice and how it can be improved.

Capital Gains - Substantial Property Portfolios

The Revenue will, for a two year trial period, agree 31st March 1982 property valuations in advance of an actual sale. This facility will be available to companies or groups that own 30 or more 31st March 1982 properties or that own fewer properties but whose aggregate value exceeds £30 million. This measure would appear to have advantages both from the Revenue’s viewpoint (it is likely to result in a more efficient use of their resources) and from the taxpayer’s point of view (where certainty is provided).


The past year has already seen a consultation exercise in relation to the proposed overhaul of the taxation of intellectual property. Intellectual property is now being seen as of key importance in the Government push to improve the position of the UK in the technology and communications area. Accordingly, that review is now being extended eg to cover the possibility of introducing tax relief for the cost of purchasing goodwill and other intangibles. This introduces the possibility that we can finally catch up with other countries such as the Netherlands and the USA. It would bring an end to the odd sight of companies with low actual tax liabilities having to report a huge effective tax rate due to the requirement for amortisation of goodwill in their accounts but not their tax computations.

At the same time, the Chancellor announced the exemption with effect from 28th March 2000 of transfers of intellectual property (but not goodwill) from stamp duty. This effective reduction of 4% of the cost of transferring intellectual property is welcome, but perhaps not primarily in the field of research and development as the Government claims, but more likely in the situation of asset takeovers of existing mature businesses in relation to which a significant part of the value relates to intellectual property rights developed over many years. Of course, there have been stamp duty saving schemes in relation to intellectual property but those have largely fallen by the wayside and accordingly this exemption must be welcomed as levelling the playing field between an asset and a share purchase. It should be noted however that the retention of stamp duty in relation to goodwill sales does mean that the widely-used rather artificial structures for business sales of using offshore contracts or written contracts accepted orally or by conduct will remain. It should also be remembered that business premises sales remain stampable and now at 4%.

It is not all good news in the intellectual property sphere. Amongst a number of other unpleasant surprises in the field of double taxation relief it should be noted that the Government has included draft clauses aimed at confirming that in all situations of cross border royalties paid out of the UK they will be entitled to challenge the royalty not simply on the basis that it is excessive in amount but also on the basis that in the absence of a special relationship (eg parent/subsidiary) between payer and beneficial owner the arrangements under which the royalties are paid at all would not have been entered into. This is an effective introduction into the sphere of royalties of the cross border thin capitalisation rules which we already have for interest. Accordingly, companies will be required to look more carefully at the terms upon which they impose royalty agreements on subsidiaries in start-up mode in the UK.


Rent Factoring

There have been several forms of “rent factoring” schemes, the broad effect of which is for a company to assign its right to a future rental stream in return for a lump sum payment made by the assignee, normally a bank. The assignor would generally seek to treat the lump sum received as the proceeds from the disposal of a capital asset against which could be set base cost and indexation. The gain itself may also be sheltered by losses. The tax treatment for the bank would be broadly the same as a loan made in the ordinary course of its business. A bank would obtain a tax deduction for the lump sum payment (amortised over the rental period) whilst paying tax on the rents received. The Inland Revenue have already made it clear that they do not necessarily accept that the lump sum paid to the assignor would be regarded as capital under current law but consider that it may be subject to tax as income under Schedule A (see Inland Revenue Tax Bulletin, June 1997). Nevertheless, the Finance Act will contain provisions that explicitly provide that the lump sum payment will be subject to tax under Schedule A.

It will be important to consider the detail of the legislation (which will apply to transactions entered into on or before Budget Day) since it has the potential to embrace transactions other than the so called rent factoring schemes. This is implicit in the Inland Revenue’s announcement which indicates that the new rules are not intended to catch capital allowance based financing. There will also be specific provisions under which transactions which have an effective economic life of more than 15 years will be excluded.

Proposed Abolition of Withholding Tax on Interest Paid under International Bonds

In a measure that appears to have one eye on the proposed Directive on EU withholding tax on savings, the Chancellor announced that, with effect from April 2001, the paying and collecting agents rules will be abolished. These rules require UK paying agents and collecting agents (whether acting as custodians or in some other capacity) to account for tax on foreign interest and dividends and, in the case of collecting agents, quoted eurobond interest paid to UK residents. Although the elimination of these complex rules is to be welcomed it must be questioned whether the extension of reporting requirements to replace them will add unacceptable administrative costs.

Ratchet Loans

A ratchet loan is a loan under which the rate of interest payable varies according to the profitability of the borrower. The Revenue has been known to take the view that interest payable under such loans attracts distribution treatment where the lender is not within the charge to UK corporation tax. This would mean that the borrower would not obtain a deduction for tax purposes. Neither would the Revenue regard the loan as a commercial loan for the purposes of group relief which could mean that the borrower is excluded from a group relief group.

New rules will be introduced to ensure that interest payable under a ratchet loan is treated as interest and the loan does not adversely affect group relief. In addition, the assignment of ratchet loans will now attract exemption from stamp duty and stamp duty reserve tax. It is anticipated that this provision will bring back into the ratchet loan business a number of banks who have been concerned about the Revenue view (notwithstanding contrary opinions from tax professionals). One remaining drawback for the banks may be perhaps an esoteric risk that a ratchet loan gives rise to a partnership with the borrower.

Share Schemes and Share Options

The Government did not make any further significant announcements on their proposals for a new all employee share plan. Shortly before the Budget we produced a briefing on the new all employee share scheme plan which sets out the current position. This can be accessed through LawNow (our free electronic information service) or if you would like to receive a hard copy please contact Mike Boutell on 0207 367 2218. It is anticipated that once the Finance Bill is published (expected in early April) we will produce a further update.

A considerable amount of lobbying of the Government has taken place for the introduction of an exemption from employees national insurance contributions for unapproved option gains. So far the Government have failed to produce a conclusive response, merely suggesting that consideration might be given to all or part of the employer’s NIC charge being transferred to the employee.

If you would like further information please contact Mark Nichols on 0207 367 2051, Mike Boutell on 0207 367 2218 or your usual point of contact. We intend to follow up with further e-mail bulletins on the Budget, the Finance Bill and their implications.