Political and regulatory news
Issue 2 - 19 May 09
Budget brings important changes for investment companies
The impact of the 2009 budget on investment companies.
The Chancellor’s primary objective in this year’s budget was to try to incubate and stimulate recovery as the UK faces the worst economic downturn for over 60 years. Headlines were monopolised by the introduction of a new higher rate of income tax of 50% and huge rises in public borrowing. Alistair Darling’s speech received a hostile response from many quarters, with critics suggesting that insufficient action had been taken to reignite the economy. However, putting the macro-economic issues to one side, the budget contained some important developments for investment companies. These were broadly welcome and in line with the AIC’s expectations, particularly given its involvement in recent tax consultations and ongoing lobbying efforts.
The Chancellor announced that the new regime allowing investment trusts to invest tax-efficiently in interest bearing assets will take effect from 1 September 2009, earlier than previously expected.
Currently, investment trusts are liable to corporation tax on any interest income that they receive. The new regime enables investment trusts to elect to receive revenue from bonds tax-free, as well as from other interest producing assets in its portfolio, and to split out or ‘stream’ any dividends paid out according to the nature of the underlying income. Interest distributions paid by investment trusts using this approach will be tax deductible, effectively removing any corporation tax liability from the company and shifting the point of taxation to the investor.
The introduction of this regime follows extensive AIC lobbying (click here to see article in December 2007 edition of Political and Regulatory News). The change is welcome and will help to put investment companies on a more level playing field with the open-ended sector.
The Chancellor announced that, from 1 July 2009, companies, including investment trusts, will no longer pay tax on overseas (and UK) dividends which they receive. This will be a benefit for those investment trusts currently paying corporation tax on overseas dividends, as these will become exempt.
The budget announcement included minor changes to the draft rules for reshaping the offshore funds regime. The rules are designed to deal with tax avoidance where offshore funds roll-up the income they receive rather than paying it out to investors, by taxing capital gains made on the disposal of shares as income. The majority of offshore investment companies are likely to fall outside the new regime, however some limited life investment companies may be caught. Overall, despite some shortcomings, the changes are proportionate and have taken account of many of the AIC’s key concerns.
In addition to introducing a new 50% tax rate for higher earners, the Chancellor also reduced the tax relief on pension contributions currently available to individuals with taxable income in excess of £150,000. Higher earners may therefore be searching for an alternative tax-efficient home for their savings. VCTs may offer an attractive proposition as they continue to give 30% tax relief for investors subscribing to new shares, thereby creating a potential pool of additional funds for VCTs.
The Chancellor announced an increase in the ISA limits from £7,200 to £10,200, of which £5,100 (currently £3,600) can be saved in cash. These changes will take effect from 6 April 2010 (although the new limits will be available to those over 50 from 6 October 2009).
- Senior accounting officers
One unexpected, and unwelcome, proposal included in the budget was an announcement that senior accounting officers of large companies, including investment trusts and venture capital trusts, will have to certify each year that the accounting systems in operation are adequate for the purposes of accurate tax reporting. Failure to comply with the regulations could result in penalties being imposed not only on the company but also on the officer personally. As well as imposing additional liabilities on investment trust and VCT directors, these regulations are likely to increase compliance costs, particularly as most boards would want to seek assurances on the accounting systems of their external managers and administrators. The AIC is seeking an exemption for investment trusts and VCTs from these requirements, as they are inappropriate for companies which do not provide the Government with significant tax revenues. The lobby is in its early stages, but we will keep members updated of any progress made.
The government is under intense pressure to tackle the current fiscal crisis and to execute measures to kickstart the economy. Regardless of this agenda, there is still scope to achieve specific improvements to the taxation regime for investment companies, and the AIC will continue to focus on this objective.
Full details of the 2009 budget can be found on HM Treasury’s website here.
Next article: Director obligations under scrutiny in governance review
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