ACCA Income Tax General Update

Date 10 May 2007

Taxation Update

Income Tax (Amendment) Bill 2007 - Paul MartinA New Income Tax Regime for Pensions -

Richard CarterA View on the New Pension Regime from the

Industry - Jon McGowan2007/08 and future changes - Alice MartinTax Credits - Paul MartinQuestions

Introduction

Income Tax (Amendment) Bill 2007

A number of amendments to the Income Tax Act 1970.

Confirms three Temporary Taxation Orders.

1. Expenditure Involving Crime

Expenditure incurred in making a payment if the making of the payment constitutes a criminal offence no deduction will be allowed for Income tax purposes.

2. Duty to Keep and Preserve Tax Records

New Section 80A into the 1970 Income Tax Act.

Currently there is no income tax legislation that requires tax records to be kept.

Corporate Taxpayers – 4 years from end of the accounting period.

2. Duty to Keep and Preserve Tax Records

Non-Corporate Taxpayers – 6 years if trading or receives rental income.– 2 years if no trade or rental income.

Records include– Trading records/accounts.– Receipts and expenses documents.

2. Duty to Keep and Preserve Tax Records

Time limit is extended if returns are submitted late.

A Penalty not exceeding £10,000 will apply for non-compliance on summary conviction.

3. Documents Relating to taxpayers

Amends the Assessor’s powers under Section 105E with regard to information gathering.

Currently, in all cases, the taxpayer must be informed if information from a third party is requested together with the reason for the request.

This amendment will allow the Assessor not to inform the taxpayer of the enquiry where he suspects fraud.

3. Documents Relating to taxpayers

Must have the approval of 2 Income Tax Commissioners.

Indemnity for Commissioners.Neither Commissioner may hear an appeal

against assessments arising from the request.Penalties for third party advising the taxpayer of

request.

4. Tax Treatment of VAT Penalties, etc.

Minor amendment to realign statutory references.

Maintain long established position.No income tax relief will be granted for VAT

penalties, surcharges or interest charges.No income tax charge will be made for VAT

repayment supplements.

5. Abolition of the Corporate Charge

Following representation the collection and administration of the corporate charge moved to the FSC from April 2007.

Reduce administration.Corporate Charge will be included within

increased filing fees £70 to £320.FSC to maintain certain exemptions granted by

the Income Tax Division.

5. Abolition of the Corporate Charge

Clause 5 repeals all Income Tax legislation relating to the corporate charge.

A deduction for the corporate charge will be introduced for companies that pay income tax at 10%.

6. Deductions in respect of Interest Payments

Deals with interest payments in rental cases.

Currently allowable if assessable to Manx tax on the lender.

From April 2007 loaning company must have a place of business on the Island.

Bona Fide purposes not reduction or avoidance of income tax.

7. Corporate Taxpayers TTO

Clause 7 confirms the Income Tax (Corporate Taxpayers) (Temporary Taxation) Order 2006.

Approved by Tynwald on 18 October 2006.

Takes account of changes to the Income Tax legislation following the passing of the Companies Act 2006.

7. Corporate Taxpayers TTO

Makes a 2006 Act Company Manx resident for income tax purposes.

Gives the Assessor the Power to request accounts where appropriate.

Confirms the end of an accounting period for merging companies.

7. Corporate Taxpayers TTO

Definition of income distribution.– Deals with dividends paid in specie.– Situations where a company purchases it’s

own shares resulting in a distribution of income reserves.

– Only charged where income is distributed.– Avoidance of tax leakage.

8. Netherlands TTO

Order was approved by Tynwald in May 2006.Agreement is in effect a transfer pricing

agreement.The Isle of Man and the Netherlands will work

together to ensure certainty of treatment, where companies have operations in both territories and goods and services are moved between them.

9. European Union Savings Directive TTO

Order was approved by Tynwald in January 2007.

European Union Savings Directive Order– To include Bulgaria and Romania within our

commitment to the EUSD.– All future members will be included.

The Taxation of Pensions in the Isle of Man

Richard Carter

Taxation of Pensions in the Isle of Man

Current Position in the Isle of Man:

– Income Tax (RBS) Act 1978

– Income Tax Act 1989 (Pt 1 & Sch 5)

– Income Tax Act 1970:• Section 49 Retirement Annuities• Section 50B International Schemes

Taxation of Pensions in the Isle of Man

Current Position in the UK:

– FA 2004: Pension Simplification – A-Day (6 April 2006)

• Annual and Lifetime Allowances • Scheme Pensions, Income Withdrawal, Annuities• Different rules for <75 and >75 years

– QROPS: • Qualifying Recognised Overseas Pension Scheme

Taxation of Pensions in the Isle of Man

Consultation in the Isle of Man– Autumn 2006, closed 17 November 2006.– Response published on Budget Day.

Consultation still ‘open’.

Taxation of Pensions in the Isle of Man

Consultation Response:

– Zero rate tax – what incentives? – Amend Current Statute.– Annual Allowance.– No Lifetime Allowance.– Non-Earners.– Triviality & Concurrency.

Taxation of Pensions in the Isle of Man

Consultation Response:

– Tax Free Lump Sum.– Annuity / Income Withdrawal. – Retirement Age.– Flexible Retirement.– Investments.

Taxation of Pensions in the Isle of Man

Next Steps– 2 Concessions to Tynwald.– Bill to House of Keys Autumn 07.– Switch on 6 April 08.

Consultation – Continues throughout Summer 07.

ACCASEMINAR: May 10th 2007

Jon McGowan

Pensions – are they still relevant?

MAC FINANCIAL• MBO from AON Financial Services 1st Jan 2004

• Acquired Marsh Financial Services 2005

• Acquired Anglo Irish Bank’s IFA division 2006

• 25 years experience IOM

• Largest Corporate IFA on Isle of Man

• 250+ schemes, 3,500 employees

• + 5,000 personal customers

• Pension; Death in Service, Long Term Disability, Healthcare, Flexible Benefits

• Private Client – Wealth Management (Financial Planning, SIPPs etc)

Pensions – still relevant?

Why do we need them?

Why plan for retirement?

Limits on total contributions

Age at beginningof tax year

% of earnings which canbe paid each tax year*

35 or under

36 to 45

46 to 50

51 to 55

56 to 60

61 to 74

17.5%

20.0%

25.0%

30.0%

35.0%

40.0%

NB - Moving to Annual Allowance April 2008

Tax Free Cash to You(Up to 25%)Income for Life

What comes out at ‘retirement’?

Benefits available between ages 50 – 75

Choice of pension type e.g. level or rising

Providers

• Norwich Union – closing to new business, why?• What does this mean -

– No new Personal Pensions

– OK for existing PPs and Group PP’s (incl adding new entrants)

• No new insurers have so far announced they are coming into market

• 3 or 4 “considering” it – including local H.O. of offshore life companies

• Competitiveness of their offering v Norwich Union

Self Invested Personal Pensions (SIPPs) – the next Big Thing?

• More flexibility• No insurer• Greater choice of investments• Annuity flexibility• Greater personal control• Money not “lost” to insurer

Budget changes

• annual allowance not directly linked to earnings • no Lifetime limit (as was brought in by the UK

last year)• contributions into pensions from non-workers • tax free lump sum increased to 30% • triviality limit increased to £15,000 • concurrency to be allowed i.e. dual membership

of corporate and personal pensions• remove the requirement to purchase an annuity

and more flexibility over how the benefits can be taken

• to increase the minimum retirement age to 55 from 2010 (as the UK have done)

THANK YOU

www.mac-financial.com

www.freesipp.com

2007/08 and Future Changes

Alice Martin

2007/08 & Future Changes

Budget Day announcements– Interest ‘cap’ for 2008/09– Benefit in Kind Review

On-line servicesCorporate Transition

– Pay & File– Transitional payment arrangements– Interest– New Return Form

Budget 2007 – Interest Paid

‘Cap’ on amount an individual can claim under Prescribed Deductions Order w.e.f. 6th Apr 08

Total loan or mortgage interest claimed £15,000 per person £30,000 per jointly assessed married couple

– Regardless of who pays Does not affect

– Business expense under S 31 or– rental ‘costs’ under S 58

• Bona fide loan – to acquire the land or– to pay for maintenance, repair, insurance or management

Budget 2007 – Interest Paid

Delay allows time for ‘re-arrangement’E.g. clear separation of private /professional /

business loansITD will write to all those who appear to be

affected by this measure

Budget 2007 – Benefit in Kind

BIK Car & Fuel Review – towards a ‘green’ approach

BIK home to work travel– Scheduled licensed transport– Employer directly pays the transport provider – No charge to a BIK

BIK electric cars now nil charge for 2007/08

Tesla Roadster Electric Vehicle

On-line Services

Phase 1 - End May 2007– Launch of on-line payments

• Credit and debit card transactions• Online remittance cards• Quick facility for Nil remittance cards• Enquiry facility

Phase 2 - End July 2007– On-line R/F for Pay and File – On-line payments for other taxpayers

2007/08 Corporate TransitionOld system, most companies

– Accounting period ending in 2006/07 will be used to raise the 2007/08 PY assessment

– Due and payable 1.1.08Pay & File

– First accounting period ending after 6.4.07– File by 12 months and 1 day later– Pay at the same time– This first accounting period under P & F may

be due a transitional payment arrangement

2007/08 Corporate Transition

Transitional Payment Arrangements PN 139/06

CompanyAccounting period end

2006 2007 2008

A Ltd 31 March

1.1.07 1.1.08 1.4.09

B Ltd 30 April

1.1.08 1.5.08 1.1.09 1.5.09

4/12 8/12

C Ltd 31 May

1.1.08 1.6.08 1.1.09 1.6.09

5/12 7/12

2007/08 Corporate Transition

Late payment of second instalment– Interest runs from new statutory due date– 12 months and one day from end of

accounting periodNew Return form for Pay and File

– One type, but two ‘routes’

Tax Credits

Paul Martin

Tax Credits

Prior to April 2007– Distribution allowed as a deduction.– No Tax Credit.– No/less differential in individual and corporate

rates.

Tax Credits

The New Regime– No Deduction for a Distribution.

As a result of zero/10, tax credit introduced to prevent double taxation of profits.

3 Types of Tax Credit– Concessional Tax Credit .– DPC Credit.– Tax Credit from 6 April 2007.

Concessional Tax Credits

Permission for capital distributions replaced by concessional tax credits for distributions from reserves from before 6 April 2006.

Reserves taxed for 2001 or earlier at 14% or more treated as capital.

Other taxed reserves distributed with a non refundable tax credit.– 2001/02 12%– 2002/03 to 2005/06 10%

Concessional Tax Credits

Distributions from reserves charged to income tax during opening years.– Where due to basis of assessment profits

have been brought into charge more than once, those profits can be distributed as capital

Concessional Tax Credits Reserves distributed through holding company.

– Distribution received charged at zero– Tax credit not utilised– Further distribution to resident individual tax credit

zero. Assessor on application will look through holding

company.– Written application signed by company and recipient

prior to payment.– Distribution should be paid to individual within 30 days

of being received

DPC Tax Credits

DPC Regime commenced 6 April 2006.Details GN 36.Any dividend from profits that have suffered

DPC will carry a DPC credit.DPC credits can only be given to Isle of Man

resident individuals.Fully credited to individual and refundable.

DPC Charge Example

2006/2007

Profit 10,000

Less: Dividend (50%) (5,000)

Taxable Profit 5,000

Tax @ 0% 0

The dividend paid is not sufficient, so the following DPC will be payable:

£10,000 X 55% X 18% X 100% = £990

A trading company owned by Mr ResidentA trading company owned by Mr Resident

DPC Credits Example

The dividend paid is grossed up :

Net X 100/100-DPC Rate Gross

5,000 x 100/90.1 5,549

The DPC credit is calculated like this:

Gross X Tax Rate Tax Credit

5,549 x 55% x 18% 549

The £5000 dividend paid will carry a DPC credit that can be claimed by The £5000 dividend paid will carry a DPC credit that can be claimed by the resident shareholder.the resident shareholder.

DPC Credits Example

The share holder will declare a gross dividend of £5,549 and claim a DPC credit of £549 by submitting a DPC credit voucher.

10% Tax Credits

The Deduction from taxable profits of dividends paid ceased on 5 April 2007.

2007/2008 assessments onwards company paying 10% will pay tax on the amount that it will distribute.

Tax Credits refundable to Isle of Man resident non-corporate taxpayers.

Tax Credits Example

2006/2007 2007/2008

Profit 10,000 Profit 10,000

Less: Dividend

(5,000) - -

Taxable Profit

5,000 Taxable Profit

10,000

Tax @ 10% 500 Tax @ 10% 1,000

In both years a dividend of £5000 was paid and is fully taxable on the shareholder. In 2006/2007 the £5000 is paid gross, in 2007/2008 it is paid net with a tax credit.

Tax Credits Example (2)

The net dividend paid is grossed up like this:

Net X 100/100-Tax Rate Gross

5000 x 100/90 5556

The tax credit is calculated like this:

Gross X Tax Rate Tax Credit

5556 x 10% 556

The The shareholdershareholder declares a gross dividend of £5556 and claims the tax declares a gross dividend of £5556 and claims the tax credit of £556 by submitting a tax credit voucher.credit of £556 by submitting a tax credit voucher.

QUESTIONS?