This Government are committed to delivering a progressive tax system that is affordable, fair and encourages growth.
As announced by the Chief Secretary to the Treasury on 17 September 2013 the Government will introduce legislation to stop people avoiding tax by using rules known as compensating adjustments.
The rules are being exploited in two areas. In the first, partnerships pay companies for services at cost price and use the tax rules to create a mark-up which is not actually paid, but which reduces the income tax bill of individual partners.
In the second type of case individuals lend money to a company in which they are a shareholder, charging excessive interest payments on which they do not pay full income tax.
The Government have consulted on technical detail and will introduce in the next Finance Bill legislation, effective from today, to stop this exploitation by denying compensating adjustments for transactions between income tax payers and connected companies.
In certain circumstances the compensating adjustment will be treated for tax purposes as a distribution of profits.
Further details on these measures are contained in a technical note published today, together with the draft legislation.