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Taxation: Avoidance Schemes

Volume 713: debated on Wednesday 21 October 2009

Statement

My right honourable friend the Financial Secretary to the Treasury (Stephen Timms) has made the following Written Ministerial Statement.

It is right that all taxpayers pay their fair share of tax. However, there are a minority who continue to seek ways to avoid paying their share. This is unacceptable. It is unfair on the majority of taxpayers, undermines fiscal sustainability, and reduces funding for public services. This Government will not tolerate tax avoidance or tax evasion in any form, and will act promptly to tackle both of these.

Several tax avoidance schemes have been notified to HM Revenue and Customs (HMRC) exploiting the sideways loss relief and double tax relief (DTR) rules, so I am today announcing changes to be made to legislation, with immediate effect, to counter these schemes.

Sideways loss relief

As made clear by the Paymaster-General in her Written Statement on 2 March 2007 and the introduction of anti-avoidance legislation in subsequent Finance Acts, the Government will not tolerate avoidance schemes designed to exploit sideways loss relief rules. The Government have recently become aware of a contrived and aggressive avoidance scheme that seeks to generate losses in a professional partnership for offset by users of the scheme against their other income or capital gains by way of sideways loss relief. This scheme relies on the creation of losses through a series of arrangements that are established for the purposes of tax avoidance.

The Government do not accept that these arrangements have the effect that is sought, but to remove any doubt, and to prevent scheme providers continuing to devise and operate even more contrived schemes that seek to challenge the sideways loss relief rules, I am announcing prompt and decisive action to protect the Exchequer.

With effect from today a general rule will be introduced to prevent sideways loss relief being given where the loss arises from arrangements and a main purpose of the arrangements is to obtain a tax reduction by means of sideways loss relief. This test does not impact on genuine loss-makers who have not entered into avoidance arrangements.

Legislation will be introduced in next year’s Finance Bill. Full details of this measure including draft legislation will be issued on HMRC’s website today.

Double tax relief: Unauthorised Unit Trusts

HMRC has been notified that unauthorised unit trusts are being used to avoid restrictions on double tax relief and to generate “repayments” of tax that the UK Exchequer has not received. To counter this, legislation will be introduced with the effect that to the extent any distribution treated as paid by a unauthorised unit trust is paid out of overseas income on which UK tax has been reduced by DTR, the distribution will be treated by the recipient as overseas income under deduction of overseas tax. The legislation will have effect from today.

A technical note setting out the details of this measure will be issued on HMRC’s website today, with draft legislation to follow shortly.

Double tax relief: Manufactured Overseas Dividends

HMRC has been notified that some companies are using manufactured overseas dividends (MODs) instead of real overseas dividends in order to disapply the anti-avoidance rules in the DTR legislation.

To counter this, legislation will be introduced amending the relevant DTR anti-avoidance provision so that it applies to deemed overseas tax deducted from MODs in the same way that it applies to real overseas dividends. The amendment will ensure that the provision can also apply in other circumstances where the UK Tax Acts treat an amount that is not overseas tax as if it were overseas tax. These changes will prevent credits for notional overseas tax from being treated more favourably than tax credits on real dividends. The legislation will have effect from today.

A technical note setting out the details of this measure will be issued on HMRC’s website today, with draft legislation to follow shortly.

Double tax relief: Manufactured Interest

HMRC has been notified that UK manufactured interest payments are being used to avoid tax under the rules relating to controlled foreign companies (CFCs) by artificial generation of DTR.

To counter this, regulations, coming into force today, will be made repealing rules that deem companies to have received UK manufactured interest under deduction of tax. Instead, the recipient will simply be taxed on the amount of manufactured interest it receives with no relief for any notional tax credit.

HMRC has identified a provision in separate regulations dealing with MODs that would allow substantially the same scheme to be implemented using MODs. To prevent this, regulations coming into force today will also be made ensuring that the MOD rules cannot be used to claim relief for overseas tax in inappropriate circumstances. Instead, the recipient will be taxed on the amount of the MOD it receives with no relief for any notional tax credit.

Both sets of regulations will be available on HMRC’s website today.