The Chancellor announced several measures aimed at “tackling tax fraud and avoidance”, and Ernst and Young have been quick to denounce a statement by the Paymaster General that seems to raise the prospect of retrospective measures to ensure employers and employees pay the “proper” amount of NIC.
Some measures have been introduced in response to more than 400 disclosures already made under the new Disclosure of Tax Avoidance Schemes rules, which provide “early warning” of schemes enabling the Government to respond with legislation or litigation.
The revenue departments would continue to analyse disclosures received, the Treasury said, and take further action “as and when appropriate”. Further details will be available on the Revenue and Customs websites.
Tax and NICs avoidance: employee remuneration
The Treasury said: “A number of avoidance schemes that seek to sidestep the rules that deal with rewards paid to employees in the form of shares and other securities are being stopped with effect from today.
“Employers are using these schemes to avoid paying the proper amount of income tax and National Insurance Contributions, particularly in relation to large bonuses in the City.”
The measures will extend the definition of securities to include certain insurance contracts; tighten the rules relating to securities that have restrictions or rights of conversion placed on them; and expand the provisions relating to benefits from employment-related securities.
The Treasury said the Paymaster General had made a written statement to Parliament today outlining the Government’s approach to dealing with “any future attempts to frustrate its intention that employers and employees should pay the proper amount of tax and National Insurance Contributions on rewards from employment”.
“Where the Government becomes aware of arrangements that attempt to frustrate this intention it will introduce legislation to close them down, where necessary from today,” it added. “Genuine” employee share schemes and share option plans would not be affected.
Aidan O’Carroll, UK head of tax at Ernst & Young, said this approach was setting a dangerous precedent: “The Government is admitting that it cannot legislate effectively. Instead it’s telling taxpayers to pay on the basis of what they think is ‘proper’ and not what it says in the law.
“We’ve consistently asked for clearer legislation that ‘does what it says on the tin’. There is always a danger that perfectly reasonable arrangements suddenly become unpopular with a government. Proceeding on this kind of basis sets a dangerous precedent and will only add to employer and taxpayer uncertainty.”
He added: “This statement mars what was generally a measured and appropriate response on the issue of ‘unacceptable’ avoidance.”
A number of “financial avoidance schemes” are being closed with effect from today.
Measures will block schemes used by companies to avoid tax on debt securities by manipulating “repo” and stock lending arrangements; and close down a scheme to avoid income tax involving corporate bonds which have had their interest payments removed (“stripped corporate bonds”).
Controlled Foreign Company (CFC) rules
Measures will stop a number of avoidance schemes with effect from today and provide “protection against possible future avoidance”.
The Treasury said the measures would ensure that profits are identified in a way consistent with UK taxation principles; prevent the artificial reduction of UK tax due by the use of the rules providing relief from double taxation where income passes through a CFC; prevent groups with several subsidiaries manipulating profits between them by using the Excluded Countries Exemption; and deny the benefit of the Excluded Countries Exemption where this is being exploited as part of a scheme for tax avoidance.
Double Taxation Relief
Avoidance schemes identified as a result of the new disclosure rules are being closed with effect from today.
The Treasury said the schemes “seek to exploit the double taxation relief and annual payment rules to increase the amount of relief due”.
A technical note published today sets out legislative proposals to “clarify the way credit is given for foreign taxes paid against trade receipts”, with the aim of determining the correct measure of profit against which credit is due.
Tax avoidance using film and partnership reliefs
Measures are introduced with effect from today to end “abuse of tax reliefs for UK film production and ensure that the reliefs operate as intended”.
The measures will prevent the accelerated relief for qualifying British films being claimed more than once on any film (‘double dipping’); stop structures which use the film reliefs to defer tax beyond 15 years; prevent companies from converting a tax deferral into an outright tax gain by exiting from a film tax deferral arrangement; and prevent partnerships from getting loss relief for money not really at risk.
The Government will introduce legislation to make the accelerated deductions claimed under the film tax reliefs clearer and easier to enforce.
The Treasury added: “In light of the steps taken against film tax avoidance both today and in recent years, and of the development of the new tax credit for low budget British films, the Government will consult with the UK Film Council and the industry in a review of the tax relief that is used by large budget British films.
“The Government appreciates the need for certainty, given the long lead times for film production. The review will therefore be taken forward on a short time-scale to the end of January 2005, and the Government invites comments from relevant parties on that basis. The need for certainty will also be taken into account in any changes that may arise as the result of this review.”
Capital Gains: uncommercial use of options
Draft legislation has been published to counter “certain tax avoidance schemes involving options to acquire or dispose of assets”.
The Treasury said: “The options are exercised at uncommercial prices to avoid tax on capital gains or to create or augment capital losses. The new rules will apply in relation to options exercised on or after today.”
Life insurance companies
A number of “loopholes” that the Treasury said were being “exploited” by life insurance companies are being closed.
New measures will ensure from today that the rules on certain transfers of business from one life insurance company to another cannot be used to reduce taxable trading profits artificially; for accounting periods ending on or after today, clarify the circumstances in which companies can treat amounts as ‘notional’ and therefore exclude them from their computations of taxable trading profits; for periods of account beginning on or after 1 January 2005, clarify the circumstances in which companies can use additional revenue accounts to obtain a more favourable tax apportionment of their investment return; and update the tax treatment of income and gains attributable to assets not needed to pay policyholder benefits.
VAT avoidance through off-shore insurance schemes
Legislation is being introduced to block from tomorrow an “offshore scheme that seeks to avoid VAT incurred in settling UK insurance claims”.
Ensuring fair input VAT recovery on supplying shares
Legislation is being introduced today to ensure fair VAT recovery on supplying shares.
The Treasury said: “With effect from tomorrow, businesses will be prevented from unfairly recovering VAT on the cost of services used to make an incidental financial supply (such as an issue or other supply of shares) to a customer in the EU by mixing these costs with costs related to supplies for which VAT is recoverable.
“Businesses will now be required in all cases to apportion the VAT based on the use to which the costs are put. The costs covered include professional fees (legal fees, accountants’ fees etc), and the costs of an associate listing on the Stock Exchange.”