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Income Tax and Corporation Tax (Anti-Avoidance)

Volume 556: debated on Monday 7 January 2013

The Government are committed to tackling aggressive and artificial tax avoidance to ensure the Exchequer is protected and fairness is maintained for the taxpayer.

In December, Her Majesty’s Revenue and Customs (HMRC) were notified of an avoidance scheme that seeks to generate loss relief from a property business which could then be used by corporate users of the scheme to reduce their corporation tax profits.

On 21 December the Government acted swiftly to tackle this scheme. It made a public announcement that targeted anti-avoidance rules will be introduced in the next Finance Bill. These rules will have effect from the date of that announcement (21 December 2012). The text of the public announcement is provided below.

The Government are extremely disappointed that this scheme has been designed and is being sold despite the Government making it clear that we will take swift action to prevent schemes like this being used by those who want to escape paying the tax they owe. The Government do not accept that these arrangements have the effect that is sought, but to remove any doubt prompt action has been taken to protect the Exchequer.

The legislation will have effect for both income tax and corporation tax purposes from 21 December 2012 and will protect significant amounts of revenue.

Draft legislation and further details of this measure were published on HMRC’s website together with the public announcement.

The text of the announcement:

“Anti-avoidance: trade and property business deductions

The Government is today announcing that it will introduce targeted anti-avoidance rules (“TAARs”) to the income tax and corporation tax provisions governing the relationship between rules prohibiting and allowing deductions from profits of a trade or property business. The TAARs will have effect from today’s date (21 December 2012).

The Government is acting today because HMRC was recently notified of an avoidance scheme that seeks to exploit the rules in relation to a property business to generate artificial loss relief for use by companies to reduce their corporation tax profits. The Government does not accept that the scheme has the effect intended but to remove any doubt, prompt action is being taken to protect the Exchequer.

The provisions in sections 31 and 274 of the Income Tax (Trading and Other Income) Act 2005 and sections 51 and 214 of the Corporation Tax Act 2009 govern the relationship between rules prohibiting and allowing deductions. They provide that certain business expenditure incurred by trades and property businesses, that would otherwise be disallowable, can be deducted from business profits.

Legislation will be introduced in Finance Bill 2013 to amend all of the above sections to include a TAAR. The TAAR will apply where a permissive rule would otherwise allow a deduction in calculating the profits of a trade or property business for an amount which arises from tax avoidance arrangements. The effect will be that the rules prohibiting a deduction take precedence over those allowing a deduction.

Tax avoidance arrangements are those to which the person is party and the main purpose, or one of the main purposes, is the obtaining of a tax advantage. The term “arrangements” will be widely defined.

The amendments will apply to amounts which arise directly or indirectly in consequence of, or otherwise in connection with, arrangements which are entered into on or after 21 December 2012, or any transaction forming part of arrangements which is entered into on or after that date, except where the arrangements are, or any such transaction is, pursuant to an unconditional obligation in a contract made before that date.”