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Tax Bulletin Issue 85

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HM Revenue and Customs -Tax Authorities

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October 2006

Contents

Changes to Retirement Annuity Contracts

All of your clients who are getting income from a retirement annuity contract will soon be seeing a change to the way their annuities are taxed.

From April 2007, under legislation introduced in Finance Act 2004, all retirement annuity income, with the exception of purchased life annuities, will be classed as pension income and taxed under PAYE.

Currently, unless the annuitant has completed a form R89 confirming that they are not liable to pay any tax, annuity providers deduct tax at the basic rate from annuities at source. This method of taxation means that some pensioners pay too much tax and the main reason for the change is to help ensure that people pay the right amount of tax on their annuities.

The change also brings retirement annuities in to line with personal and occupational pensions from UK pension schemes which are generally also subject to PAYE. This helps to simplify the tax calculation for pensioners and reduces the administrative burden on providers who will no longer have to maintain a different tax accounting system for annuities.

There are up to 1.2 million individuals who are getting income from retirement annuity contracts. About half of them have claimed exemption from tax and so receive their payment gross. The rest have tax deducted at the basic rate, and for those who are basic rate or higher rate taxpayers this is not a problem. But we estimate that there are around 200,000 people who are not liable to pay tax, are only liable at the 10% starting rate, or are liable at basic rate on part of their annuity income, and who are having basic rate tax deducted from all of their annuity.

What we are doing now

We are creating new PAYE schemes for every annuity provider, and setting up new tax records for all of the annuitants who are not currently on our databases. This has involved writing to around 350,000 annuitants asking for details to help us to ensure that that they pay the right amount of tax from April.

Overpayments

Although tax overpaid can be repaid for all in date tax years, many pensioners have never made a claim. The main reasons are that they may not realise that tax has been deducted, and it can be a complicated and time consuming process for them to fill in the forms. We have made special efforts in the past to encourage them to do so (for example, our various ‘TaxBack’ campaigns).

But this new process will provide the information we need to enable us to identify just who these pensioners are, and to make a renewed effort to help them claim and receive their repayments.

Underpayments

We also recognise that the personal and financial circumstances of many annuitants have changed since they completed the R89 certifying that at that time they were not liable to pay tax on their income. Whilst some will still not be liable to pay tax, others will. But from April 2007, every annuitant will pay the right amount of tax due based on the information provided to us. Where we identify anyone who should have paid tax prior to April 2007 but has not, we will not be taking any action to either formally assess those years or take any action to recover any tax arrears. The only exception to this will be in very serious cases where we find that false statements or Returns have been made to deliberately avoid paying the tax due.

Contacting annuitants

In January 2007, we will be sending a letter to up to 275,000 annuitants who are currently getting their annuity gross, but who may find that from April 2007 they have some tax to pay because of changes in circumstances since they completed form R89. We will be re-assuring them that we will not be trying to recover any tax arrears unless we find evidence of deliberate action to avoid tax.

And in February, we will send every annuitant a notice of coding form P2 telling them how their PAYE tax code number has been worked out.

Multiple annuities

It is common for pensioners to have several different annuities, often with different Providers. And due to changes in the pension industry, the providers often sell their ”annuity books” on to new Providers. These situations can complicate the PAYE records setting up process, especially during the transition period from now until April 2007.

We are aware of several large “annuity book” transfers taking place in the run-up to the switch to PAYE, and this will result in some annuitants getting conflicting information about who is paying their annuity. We are working with Providers to minimise this, but we cannot cover every eventuality. And some Providers want us to give them tax code numbers for every annuity which they pay to the same person. So we know that some pensioners will get up to 15 envelopes from HMRC on the same day, containing what will appear to be duplicate tax codes.

Existing Self Assessment or Annual Repayment Customers

Where the retirement annuity is the only PAYE source of income of an existing SA customer, Leics and Northants (see aside) will take responsibility for any SA record immediately. Where there is already an existing PAYE source the SA record will not move. The telephone number for Leics & Northants SA queries is 0845 302 1445.

Where the annuitant has been making annual repayment claims to one of our IRO offices, the year ending 5 April 2007 will be the last year of such claims to those offices. Leics and Northants will take responsibility for such claims from that date.

Support for annuitants and Providers

So that we can provide all annuitants and providers with a complete and consistent service, we have concentrated all retirement annuity contract work into a new unit in our Leics & Northants Large Processing Office. It will handle all customer enquiries, whether by letter or by phone.

And we have set up a dedicated phone helpline for annuitants on 0845 366 7868. Lines are open Monday to Friday 8.30am to 5.00pm.

The address of our retirement annuity contract unit is:

Leics and Northants LPO
RACS Unit
Saxon House
1 Causeway Lane
Leicester
LE1 4AE.

The Pension schemes pages have more information about information about retirement annuity contracts.

HMRC sets up specialist units for R&D tax credit claims

HM Revenue & Customs is setting up seven specialist research and development (R&D) tax credit units around the country. The units will be up and running from 1 November 2006 and will deal with all R&D tax credit claims from companies apart from those dealt with by the Large Business Service. The units will deal with claims from small and medium enterprises under Schedule 20, Finance Act 2000 as well as claims by large companies under Schedule 12, Finance Act 2002 and claims to vaccine research relief under Schedule 13 Finance Act 2002.

The units will be located in:

  • Cambridge
  • Croydon
  • Leicester
  • Maidstone
  • Manchester
  • Southampton
  • Cardiff (covering Wales, Scotland and Northern Ireland)

The Cardiff unit will have a small satellite office in Scotland to carry out customer service and enquiry work there.

The aim of these specialist units is to improve the handling of claims by concentrating the work in a smaller number of locations staffed by specially trained officers. This should lead to greater consistency from HMRC in dealing with claims and more certainty for companies making claims.

Another important role for the new units will be to raise awareness of the scheme among eligible companies, their agents and organisations such as Chambers of Commerce, Regional Development Agencies and Business Link Offices. Although most companies carrying out qualifying R&D are aware of the availability of R&D tax reliefs, there are still some that are not. In 2005, HMRC commissioned a survey of nearly 1,000 companies carrying out R&D. The survey found that 82% of respondents were aware of the relief prior to the survey. And 71% of respondents who were aware of R&D tax credits and thought their company was eligible had already made a claim. Of those companies that had made a claim, around three-quarters found the claims process easy or fairly easy.

Although these figures are very encouraging, there is room for improvement, especially among smaller companies. The survey showed that companies with fewer than 10 employees were less likely to have a good understanding of the scheme or to have claimed.

In November 2006, the DTI is publishing a brochure of case studies setting out the experiences of 14 companies that have claimed the relief. The brochure covers a variety of company sizes, locations and industries and demonstrates the very wide diversity in nature and scale of R&D across the country. The brochure will be available via e-mail from the DTI publications orderline or by calling 0845 015 0010, and for downloading from the R&D pages of the DTI and HMRC web-sites . In conjunction with the brochure the DTI is also publishing a pocket-sized leaflet selling R&D Tax Credits within the wider innovation message and sign-posting to the booklet for further information.

Background

Research and development tax credits are a company tax relief which can either reduce a company’s tax bill or, for some small or medium sized companies, provide a cash sum. The relief is not available to unincorporated businesses or partnerships.

The aim of the tax credits is to encourage greater R&D spending in order to promote investment in innovation. Between April 2000 and April 2006 around 22,000 claims for R&D tax credits were made with almost £1.8 billion of support claimed.

The R&D tax credit works by allowing companies to deduct up to 150% of qualifying expenditure on R&D activities when calculating their profit for tax purposes. Small or medium companies can, in certain circumstances, surrender this tax relief to claim payable tax credits in cash from the HM Revenue & Customs. Although the term “tax credit” only strictly applies to the payable cash element available to small and medium enterprises, it is commonly used to refer to the enhanced deduction against profits as well. That practice has been adopted in this article. More detailed information is available, including advice on how to claim.

In December 2005 the Chancellor announced that the administration of R&D Tax Credits for companies would be improved by creating specialist R&D units to deal with all R&D tax credit claims outside the Large Business Service (which deals with the thousand or so very largest companies). Work has been ongoing since then to ensure that the units are operational and will deal with all new claims from 1 November 2006.

A three day training event for HMRC staff joining the new units was recently held in the HMRC training college in Lincoln. This included specialist training on software R&D claims, produced with the help of Intellect (the trade association for the IT, telecommunications and electronics industries) and R&D specialists from the big four accountancy firms.

Action required

From 1 November 2006, companies and agents should send corporation tax returns with R&D tax credit claims to the specialist unit dealing with the postcode for the location of the main R&D activity of the company. This is a departure from the traditional practice where HMRC has normally allocated companies to tax offices on the basis of the address of the company’s Registered Office. This new approach is designed to help achieve the customer service aims of the initiative. It will help the new units if companies and agents state the location of their main R & D activity in claims to relief after 1 November 2006.

A list of postcodes dealt with by each office is included at the end of this article, together with the contact address for each office.

There are four general exceptions to this:

  • Companies dealt with by the Large Business Service.
  • Companies dealt with by the specialist pharmaceutical units in Manchester, Cambridge and Croydon should continue to send their returns to their current tax office.

It has recently been decided to move the work currently dealt with by the Reading pharmaceutical unit to Southampton, so pharmaceutical companies dealt with by the Reading office should now send their R&D claims to Southampton.

  • Companies dealt with by the SCECs (Small Company Enterprise Centres) in Maidstone and Cardiff should continue to send their returns to these offices.
  • Companies dealt with by HMRC Charities in Bootle should continue to send their returns there.

Companies in Wales, Scotland or Northern Ireland that are not in the four categories above should send their claims to the Cardiff unit.

There will be a transitional period running from 1 November 2006 to April 2007 in which the corporation tax responsibilities for most companies with existing claims will be transferred to the appropriate specialist unit. Companies and their agents affected by this will be kept informed during the process.

The intention is that in most cases the R&D specialist unit will deal with all aspects of a company’s corporation tax return if it includes an R&D claim. This is similar to the approach HMRC has already got in place for companies dealt with by the Small Company Enterprise Centres.

But for a small number of very large companies or groups the R&D claim is only one relatively minor element of their tax affairs. In these cases, the main tax office will stay the same, but the R&D claim will be handled with input from the appropriate specialist unit. These cases will be identified by the specialist units on a consistent basis, so companies who think they may be covered by this situation should follow the general advice to send their R&D claims to the appropriate specialist unit.

From 1 November 2006, agents or companies with specific questions about making R&D claims under the new set-up are encouraged to contact the appropriate specialist unit for advice. Contact details for the new units are as below:

Cambridge R&D Unit
Eastbrook
Shaftsbury Road
Cambridge
CB2 2DJ
Telephone 01223 442534

Croydon R&D Unit
Southern House
Wellesley Grove
Croydon
Surrey
CR9 1WW
Telephone 0208 633 4307

Leicester R&D Unit
Saxon House
1 Causeway Lane
Leicester
LE1 4AA
Telephone 0116 2535400

Maidstone R&D Unit
Medvale House
Mote Road
Maidstone
Kent
M15 6AE
Telephone 01622 760403

Manchester R&D Unit
6th floor
Albert Bridge House
1 Bridge Street
Manchester
M60 9AF
Telephone 0161 288 6118

Southampton R&D Unit
8th Floor
Queens Keep
1 to 4 Cumberland Place
Southampton
Hampshire
SO15 2UN
Telephone 02380 204253

Cardiff R&D Unit (Wales, Scotland and Northern Ireland)
14 West, Phase 2
Ty Glas
Llanishen
Cardiff
CF14 5FP
Telephone 029 2032 7003/7026

List of postcodes covered by each office:

From 1 November 2006, companies whose main R&D activities are located in one of the following postcodes should send their corporation tax returns containing R&D tax credit or relief claims to the appropriate office listed below.

AB Cardiff
AL Cambridge
B Leicester
BA Cardiff
BB Manchester
BD Manchester
BH Southampton
BL Manchester
BN Maidstone
BR Croydon
BS Cardiff
BT Cardiff
CA Manchester
CB Cambridge
CF Cardiff
CH Manchester
CM Maidstone
CO Maidstone
CR Croydon
CT Maidstone
CV Leicester
CW Manchester
DA Maidstone
DD Cardiff
DE Leicester
DG Cardiff
DH Manchester
DL Manchester
DN Leicester
DT Southampton
DY Leicester
E Maidstone
EC Maidstone
EH Cardiff
EN Cambridge
EX Cardiff
FK Cardiff
FY Manchester
G Cardiff
GL Cardiff
GU Southampton
HA Cambridge
HD Manchester
HG Manchester
HP Croydon
HR Cardiff
HS Cardiff
HU Leicester
HX Manchester
IG Cambridge
IP Cambridge
IV Cardiff
KA Cardiff
KT Croydon
KW Cardiff
KY Cardiff
L Manchester
LA Manchester
LD Cardiff
LE Leicester
LL Cardiff
LN Cambridge
LS Manchester
LU Cambridge
M Manchester
ME Maidstone
MK Cambridge
ML Cardiff
N Cambridge
NE Manchester
NG Leicester
NN Cambridge
NP Cardiff
NR Cambridge
NW Croydon
OL Manchester
OX Southampton
PA Cardiff
PE Cambridge
PH Cardiff
PL Cardiff
PO Southampton
PR Manchester
RG Southampton
RH Maidstone
RM Maidstone
S Leicester
SA Cardiff
SE Maidstone
SG Cambridge
SK Manchester
SL Croydon
SM Croydon
SN Southampton
SO Southampton
SP Southampton
SR Manchester
SS Maidstone
ST Leicester
SW Croydon
SY Cardiff
TA Cardiff
TD Cardiff
TF Leicester
TN Maidstone
TQ Cardiff
TR Cardiff
TS Manchester
TW Croydon
UB Croydon
W Croydon
WA Manchester
WC Cardiff
WD Cambridge
WF Manchester
WN Manchester
WR Cardiff
WS Leicester
WV Leicester
YO Leicester
ZE Cardiff

An update on Double Taxation Agreements (Dtas) and Tax Information Exchange Agreements (Tieas)

Annual Review

The Government reviews the UK’s treaty priorities each year to ensure that the treaty network continues to meet the needs of those conducting business overseas or receiving income from abroad. HM Revenue and Customs monitors the effectiveness of the UK’s DTAs and invites representations from business, individuals, representative bodies, other Government departments and others with an interest in this area. The comments received provide useful information on problems experienced with existing treaties and potential gaps in the treaty network.

The Paymaster General, Dawn Primarolo MP, recently announced details of the negotiating programme for DTAs and TIEAs for the year to 31 March 2007. Full details were given in the HM Revenue and Customs News Release NAT 41/06 issued on 24 July 2006 and a summary is given below, updated with more recent developments.

Negotiating Programme

  • We plan to complete work on new treaties with Macedonia, Moldova, Slovenia and Thailand; and on a Protocol with Switzerland.
  • We intend to progress negotiations with the Cayman Islands, China, Germany, Hungary, Faroe Islands, the Netherlands, Libya and Saudi Arabia.

We also intend to progress TIEA negotiations with the Crown Dependencies and Overseas Territories.

New/Exploratory Talks

We have plans for Protocols to amend the existing DTAs with Australia, Mexico, New Zealand and South Africa. We will make further announcements about talks with other countries as and when arrangements are in place.

Representations on these and other negotiations are welcome (see the section below for details). We will generally invite country-specific representations through a News Release shortly before we begin any initial negotiations.

Recent Developments With DTAs and TIEAs

Anguilla
A second round of TIEA negotiations was held in The Valley in April 2006.

Bermuda
A second round of TIEA negotiations was held in London in September 2006.

Botswana
The DTA with Botswana, signed in Gaborone on 9 September 2005, entered into force on 4 September 2006. The provisions of the DTA will apply in the UK from 1 April 2007 (for corporation tax) and from 6 April 2007
(for income tax and capital gains tax). The provisions of the DTA will apply in Botswana from 1 July 2007.

British Virgin Islands
A second round of TIEA negotiations was held in London in July 2006.

Cayman Islands
A third round of talks was held in Cayman in March 2006.

China
A second
round of negotiations took place in China in April 2006.

Faroe Islands
A first round of talks will take place in Tórshavn in October 2006.

Georgia
The DTA with Georgia, signed in London on 13 July 2004, entered into force on 11 October 2005. The provisions of the DTA apply in the UK from 1 April 2006 (for corporation tax) and from 6 April 2006 (for income tax and capital gains tax). The provisions of the DTA apply in Georgia from 1 January 2006.

Germany
A further round of talks will take place in London in October 2006.

Hungary
A first round of talks took place in Budapest in June 2005. We hope to hold a second round in London before the end of 2006.

Japan
The new DTC with Japan, signed in London on 2 February 2006, was approved by Parliament on 17 May 2006 and published as Statutory Instrument 2006 No. 1924 on 19 July 2006.

Libya
A first round of talks took place in Tripoli in November 2005.

Macedonia
A first round of talks took place in Skopje in June 2006.

Moldova
A first round of talks took place in Chisinau in October 2005.

Poland
A new comprehensive DTA was signed in London on 20 July 2006. The text of the DTA (PDF 130K) is available and will be published in due course as a schedule to a draft Order in Council and laid before the House of Commons for approval.

Switzerland
A second round of talks took place in Bern in January 2006.

Thailand
A second round of talks took place in Bangkok in March 2006.

EU Savings Directive agreements

Agreements on the taxation of savings with Guernsey, Jersey, the Isle of Man, Anguilla, the British Virgin Islands, the Cayman Islands, Montserrat, the Turks & Caicos Islands, the Netherlands Antilles and Aruba all came into effect on 1 July 2005. A similar Agreement with Gibraltar was approved by Parliament in the spring and entered into force on 1 April 2006.

Representations

General representations concerning new DTAs, or suggestions about changes to existing agreements, are welcomed and should be addressed to:

Tax Treaty Team
HM Revenue & Customs
3rd Floor (Room 3C/20/07)
100 Parliament Street
London
SW1A 2BQ

Queries regarding the effects of a DTA on a particular taxpayer’s tax liability should always be referred to the tax office responsible for dealing with their tax affairs.

Further Information

Further information on double taxation and related issues can be obtained by visiting the relevant pages of this website.

Copies of double taxation agreements published from 1997 onwards can be found on the Stationery Office's website or purchased via the tsoshop website.

Copies of older agreements can be obtained from the Stationery Office - Telephone 0870 600 5522.

General double taxation issues arising in connection with estates, inheritances and gifts should be addressed to:

Inheritance Tax Policy
Charity, Assets and Residence
HM Revenue & Customs
Room G73
100 Parliament Street
London
SW1A 2BQ

PAYE Payments

HMRC are currently reviewing their PAYE payment processes in order to support and encourage employers to pay their PAYE on time.

Although many employers pay their monthly PAYE/NICs by the due date of 19th/22nd of the month, a significant proportion do not. Some employers fall seriously in arrears putting their business at risk. This not only causes problems for HMRC but also in the long term for employees trying to obtain benefits.

As part of this review some employers will find that HMRC are contacting them for payment at an earlier date than they may be used to.

Tax Bulletin

Thank you for your suggestions about the new product that will replace Tax Bulletin online in 2007.

Tax Bulletin 86 will have more information about the new product.

Content

The content of Tax Bulletin gives the views of (HMRC) technical specialists on particular issues. The information published is reported because it may be of interest to tax practitioners. Publication will be six times a year, and include a cumulative index issued on an annual basis.

  • You can expect that interpretations of the law contained in the Bulletin will normally be applied in relevant cases, but this is subject to a number of qualifications.
  • Particular cases may turn on their own facts, or context, and because every possible situation cannot be covered, there may be circumstances in which the interpretation given here will not apply.
  • There may also be circumstances in which the Board would find it necessary to argue for a different interpretation in appeal proceedings.
  • The Bulletin does not replace formal Statements of Practice.
  • The Board’s view of the law may change in the future. Readers will be notified of any changes in future editions.
  • All the names used in examples and illustrations are imaginary and have no relation to real persons, living or dead, except
    by coincidence

Nothing in this Bulletin affects a taxpayer’s right of appeal on any point.


About the Author

© Crown Copyright 2006.

A Licence is need to reproduce this article and has been republished for educational/ informational purposes only. Article reproduced by permission of HM Revenue & Customs under the terms of a Click-Use Licence. Tax bulletins are updated regularly and may be out of date at time of reading.


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Article Published/Sorted/Amended on Scopulus 2007-11-02 11:22:35 in Tax Articles

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