2.1 DISCLOSURE RULES
The disclosure rules require promoters or users of certain tax avoidance schemes or arrangements to provide information to the Revenue Departments. These only apply to schemes described in the regulations issued in August. The Chancellor has today announced an extension of the rules to include:
· schemes involving stamp duty land tax on commercial property; and
· two more listed VAT schemes and an additional VAT hallmark.
2.2 AVOIDANCE THROUGH ARBITRAGE
Measures have been introduced to prevent companies playing off different sets of tax rules to gain a UK tax advantage. This will prevent companies exploiting differences in the way tax rules apply to them but will only apply where a UK tax advantage is sought. The legislation will only apply if the Inland Revenue issue a notice and will not apply if the tax reduction is minimal. The Inland Revenue is publishing detailed guidance and will provide informal clearances from today.
2.3 ABUSE OF DOUBLE TAXATION RELIEF
A new measure is being introduced to prevent tax avoidance schemes that exploit double taxation relief (DTR). The legislation takes effect from 16 March 2005 and will deny excessive DTR where:
· relief results from a scheme or arrangement that has tax avoidance as a sole or main objective; and
· one or more of five circumstances, as specified in the legislation, apply.
The legislation also means that claims will be denied in respect of income acquired for the purposes of securing excessive DTR (for example, foreign dividend buying).
The legislation only applies if the Inland Revenue issue a notice and will not apply if the tax reduction is minimal. The Inland Revenue is publishing detailed guidance and will provide informal clearances from today.
2.4 TAX ON CAPITAL GAINS
Two new measures to counter avoidance of tax on capital gains by exploiting double taxation agreements have been introduced with effect from 16 March 2005. In addition the range of assets treated as located in the UK for CGT purposes will be expanded. These are dealt with in section 5.4 (capital gains tax) below.
2.5 FINANCIAL PRODUCTS
A package of measures targeting avoidance by companies and individuals using financial products is being introduced. The following schemes, reported under the disclosure rules, are being blocked:
· conversion by companies of interest-like income into a form that it is subject to lower tax or no tax;
· exploitation of the group continuity rules for loan relationships and derivative contracts to convert income into capital, or take advantage of different accounting methods used by different companies within a group;
· exploitation of the relief available to companies for annual payments as charges on income; and
· rent factoring schemes that attempt to circumvent the Finance Act 2000 anti-avoidance rules by arranging deals that exceed the 15 year exception limit.
A further measure blocks an income tax scheme involving a stock loan of gilts, which is said to result in a double deduction under the manufactured interest and Accrued Income Scheme (AIS) anti-avoidance rules.
2.6 CORPORATE INTANGIBLE ASSETS
A marketed avoidance scheme for the corporate intangible assets regime is being blocked. This will ensure that intangible assets existing before the regime commenced in April 2002 only qualify for tax relief under the regime when acquired by companies from unrelated parties. This measure ensures that the regime operates as intended.
Changes will also be made to the market value rules within the intangibles regime to ensure that other tax provisions work as intended.
2.7 STAMP DUTY LAND TAX
A number of avoidance schemes, which have been used to reduce or eliminate liability to stamp duty land tax (SDLT) on land transactions are blocked. These include:
· exploitation of group relief and acquisition relief to enable land to be transferred out of a group without the purchaser paying SDLT or tax at 0.5 per cent;
· use of nominees to avoid the charge on leases; and
· schemes purporting to disguise the purchase price as a (potentially repayable) loan or deposit.
2.8 PARTIAL EXEMPTION
The aim of the VAT partial exemption rules is to achieve fair recovery of input tax for businesses that make a mixture of exempt and taxable supplies. Four measures are being introduced to prevent certain revenue losses and ensure fair recovery of VAT. These measures include widening the circumstances in which Customs will issue a Special Method Override Notice and will come into effect from 1 April 2005.
2.9 CUSTOMS’ WAREHOUSING REGIMES
A loophole that has allowed some businesses to exploit the VAT-free status of sales within UK Customs’ warehouses will be closed after Royal Assent to the Finance Bill. The measure will allow Customs to make regulations requiring certain types of supplies of goods in Customs’ warehouses to be taxed according to normal domestic VAT rules, rather than benefiting from the tax-free status that is normally applied to supplies of warehoused goods.
The measure will ensure that correct amounts of VAT are paid overall. The regulations will only be used to target artificial arrangements designed to avoid tax and will not affect the overwhelming majority of businesses enjoying the trade facilitation measure of VAT-free trading within Customs’ warehouses.
2.10 TOBACCO & ALCOHOL STRATEGY
Provisions dealing with tobacco smuggling and alcohol fraud are also introduced.
2.11 FILM PARTNERSHIPS
The Budget confirms the anti-avoidance measures announced in the Pre-Budget Report last December. The measures applying from 2 December 2004 are as follows:-
1. It will no longer be possible for tax relief to be claimed by more than one party for one film. It appears that films were sold by one party who had already claimed tax relief under section 42 (Finance (No 2) Act 1992) or 48 (Finance (No 2) Act 1997) to another party who then claimed the same relief. In future a new owner will only be able to claim relief if the previous owner has not claimed relief and has also elected not to claim relief.
2. Tax relief under section 42 is limited to the total production costs – as it was for relief under section 48 on 17 April 2002.
3. The deferral period is limited by law to 15 years. In the past the Inland Revenue had generally accepted 15 years without question but would allow longer periods on a case by case basis. However, it is concerned that investors seek to extend the period further into the future to increase the benefit of tax deferral. This will apply only where there is a guaranteed income return on the lease-back of the film (which occurs in most film partnership cases). Tax relief is given only on the expenditure multiplied by 15 and divided by the agreed lease period. Therefore if the lease period is 20 years only 75% of the expenditure will get relief.
4. Measures are to be introduced to stop groups of companies avoiding the tax charge on future rental receipts by using an “exit” scheme. This converts the deferral of tax into a permanent tax advantage. Under this measure companies will be required to bring in the value of the film right not yet brought into the tax charge as a trading receipt at the time of the exit event.
5. Measure will prevent partners obtaining loss relief in excess of their capital contribution for which they are fully at risk and also prevent such non-risk contributions from being counted when computing the exit charge for individuals benefited by film relief.