IR27 29 November 1994 SELF ASSESSMENT The Chancellor proposes in his Budget to make changes to the tax system as part of the move to self assessment. He intends to introduce measures, mainly in the Finance Bill, to: reform and simplify, for income tax, the basis of taxation of income from property; simplify the procedures for taxing non-residents and align them with self assessment; provide for employers to give their employees information they will need to complete tax returns; introduce anti-avoidance legislation to deter artificial manipulation of profits and income to take advantage of the transitional provisions introducing the current year basis of assessment for tax on the self-employed; make various other changes to simplify the taxation system. These proposals represent the second phase of the changes necessary to bring about the most fundamental reform of personal tax administration for 50 years. DETAILS Income from property 1. Various changes are proposed to simplify the income tax rules which apply to the taxation of income from property situated in the United Kingdom (see separate press release IR28/94 "Taxation of Income From Property and Self Assessment"). Non-residents 2. The present patchwork of rules and Extra Statutory Concessions under which tax is charged on non-residents will be replaced by clear simple rules. The new rules will make self assessment easier for non-residents and their United Kingdom representatives. The tax charge will be broadly unchanged. The main rules for taxing non-resident taxpayers will be: income from property in the United Kingdom will be taxed through deduction at source by the agent for the property or, where there is no agent, the tenant with a final settling up with the non-resident; but where the non-resident chooses, by agreement with the Inland Revenue, to include tax on income from property in payments on account made by the non-resident under self assessment, no deduction will be required at source; the tax charge on the profits of a trade carried on by the non-resident in the United Kingdom, whether as a sole trader or in partnership with others, will be limited to the profits from the part of the trade carried on in the United Kingdom, measured on the arm's length principle; the tax charge on investment income of the non-resident, other than income from property in the United Kingdom, and on income from trading in the United Kingdom through a broker or investment manager will be limited to the tax, if any, deducted at source. 3. The administrative rules for the deduction of tax at source on income from property will appear in regulations. Consultations will continue with representative bodies on the detail. 4. Where an individual carrying on a trade wholly or partly outside the United Kingdom becomes or ceases to be resident, the individual will be taxed as if the trade had ceased and recommenced. This will ensure that the correct amount of profits are taxed. 5. The rules under which a branch or agent of the non- resident may be taxed on behalf of the non-resident, which appear in Part VIII of the Taxes Management Act 1970, will be rewritten. The new rules will only apply where the non- resident is carrying on a trade in the United Kingdom through a branch or agent. The branch or agent will then be jointly responsible with the non-resident for everything which needs to be done in connection with the self assessment of the profits from or connected with the branch or agency. These rules will apply similarly to the charge on non-resident companies under Pay and File. 6. But as at present, the rules will not apply to agents who are not carrying on a regular agency for the non-resident. Members' agents and managing agents at Lloyd's will also be excluded in line with changes made in recent years which did away with taxing Lloyd's underwriters through their agents. The present exclusions for investment managers and brokers will also continue with certain modifications (see separate press release IR 31/94 "Investment Managers"). 7. The present rules for branches and agents include various provisions on the tax chargeable on the branch or agent (section 79 - profits from branch or agency, section 80 - charge on percentage of turnover, section 81 - taxation on basis of merchanting profit, section 82(2) - saving for transactions with other non-residents). These will not reappear in the new rules as they are unnecessary. They are superseded by the general rules which limit the charge on the branch or agent to the profits from or connected with the branch or agent and require those profits to be measured on the arm's length principle. 8. Extra Statutory Concession B13, which limits the tax chargeable on untaxed interest paid to non-residents, will also be superseded by the new rules on the limitation of charge, and will therefore not apply for tax years 1996-97 on. Employers and employees 9. The measures the Chancellor is putting forward will implement the main proposals in the Inland Revenue's consultative document "Self Assessment: what it will mean for employers and employees" published on 9 May 1994. 10. Details of the changes are given in a separate press release IR 29/94 "Self Assessment: employers and employees - outcome of consultations", which also reports on the responses to the consultation. The changes will mainly affect employers who make expenses payments or provide taxable benefits in kind for employees. They will take effect from the tax year 1996- 97. 11. Most of the measures proposed will be given effect in PAYE Regulations, although some will be in legislation proposed for the 1995 Finance Bill. Drafts of these regulations and of an associated clause proposed for the next Finance Bill are also being published today in the press release mentioned in paragraph 10 above. Transition to the Current Year Basis - Anti avoidance provisions 12. Finance Act 1994 contains provisions for the introduction of the current year basis of assessment for the profits of the self-employed and other income that is not taxed at source. Under the new basis, income arising in a particular year is taxed for that year. The old basis broadly taxed the income arising in the previous tax year. The rules for the transition from the previous year to the current year basis ensure broadly that there is no double taxation of business profits or other income. 13. The Government announced on 31 March 1994 that it would introduce in the 1995 Finance Bill rules to counteract the effects of artificially moving profits or income into the period of transition. The Inland Revenue have today published the draft legislation and a commentary, details of which are contained in a separate press release IR 30/94 "Self Assessment: Transition to the Current Year Basis - Anti-Avoidance Provisions". Other measures Interest Relief 14. As a consequence of the proposed changes to the taxation of income from property (see paragraph 1 above) it will be necessary to change the existing provisions for allowing interest relief in respect of commercially let property. From 6 April 1995 interest payable in respect of a property letting business will be allowable as a deduction in computing the profits of the business. The current rules - under which interest paid is allowed as a deduction from letting income, provided the property is let at a commercial rent (or is available for letting) for more than 26 weeks in a period of 52 weeks - will be repealed. 15. In addition, minor amendments will be made to the provisions of the mortgage interest relief at source (MIRAS) scheme to reflect changes in other legislation. These will have effect from the time Finance Bill 1995 receives Royal Assent. Trustees 16. New rules will be introduced for the assessment and collection of tax on trust income and gains where there is more than one trustee. Anything done by or to any liable trustee will be treated as done by or to all the liable trustees. This means that any liable trustee will be able to make a return and self assessment and these will be treated as satisfying the tax obligations of all the liable trustees. Conversely liable trustees will be accountable for errors, failures or omissions in meeting their tax obligations. The new rules will take effect from the 1996-97 tax year. Beneficiaries of Estates 17. The tax treatment of residuary beneficiaries of deceased persons' estates will be simplified, making it easier for them to self assess. From 6 April 1995 payments to beneficiaries out of the income of the residue of an estate will be taxable in the year of receipt. There will be no spreading of liabilities across the administration period. The new rules will apply to estates in the course of administration at 6 April 1995 as well as to new estates. 18. At the same time technical defects will be corrected in the legislation applying to foreign income dividends and certain forms of deemed income received by personal representatives of deceased persons' estates, and to payments made out of such income to residuary beneficiaries. NOTES FOR EDITORS 1. Finance Act 1994 introduced, with effect from the tax year 1996-97, new rules for filing tax returns. The new system includes the option for people to calculate their own tax bill from the figures on their return, or to ask the Inland Revenue to make the calculation for them. To make this easier the complex preceding year basis which was used for taxing income from self-employment and some investment income was abolished, and payment dates were aligned for all income tax levied by assessment, and for capital gains tax. This allows all tax to be brought together in one bill. 2. The proposals were the result of widespread consultation including two Consultative Documents. Consultation has continued on the matters which will feature in the next Finance Bill, and will continue on more detailed issues such as the design of the self assessment tax return. The intention is to involve taxpayers and representative bodies in helping to construct the detail of self assessment in the most effective and least burdensome way. 3. A third Consultative Document entitled "Self Assessment: what it will mean for employers and employees" was issued on 9 May 1994. It made proposals for employers to give their employees the information they will need to complete a tax return after April 1997. 4. The Inland Revenue have also issued a number of publications to help explain the new rules and help taxpayers comply with them: - Two guides have been published for the benefit of taxpayers and practitioners as well as Inland Revenue officers. The first - "A Guide to the Current Year Basis" - explains the changes to the basis of assessment. The second - "The Legal Framework" - explains the legal background to the changes to the system of direct taxation of personal taxpayers; - Two leaflets, "How your business profits are taxed" and "Self Assessment, An Introduction" were published in July and September respectively. 5. Further details of the changes will be provided when the Finance Bill is published in 1995. Most of the changes will come into effect for the tax year 1996-97, the first year of self assessment. The main exceptions are the changes to the rules for taxing income from property (paragraphs 1 and 14), and the rules for beneficiaries of estates (paragraph 17), which apply from 1995-96. 6. Assessments of the compliance costs affecting businesses are available. A copy of the Compliance Cost Assessment for this proposal can be obtained by writing to: Danny Connor Inland Revenue Deregulation Unit Room F7 West Wing, Somerset House LONDON WC2R 1LB