The commentaries below are written in general terms. Details can also be found in our downloadable Budget Report brochure, which will be available shortly. You are strongly recommended to seek specific advice before taking any action based on the information given, both in the commentaries and in the publication.
General anti-abuse rule (GAAR)
In December 2010, the Government asked Graham Aaronson QC to lead a study to consider whether there should be a general anti-avoidance rule for the UK. The study group published its report in November 2011, and recommended the introduction of a narrowly focused general anti-abuse rule. This was accepted by Government in the 2012 Budget.
The GAAR will counteract tax advantages arising from abusive tax avoidance arrangements. It will apply to income tax, national insurance contributions , corporation tax, capital gains tax, inheritance tax, petroleum revenue tax, stamp duty land tax and the new annual tax on enveloped dwellings. It will become effective from the time the Finance Bill 2013 receives Royal Assent.
Comment
The general anti-abuse rule (GAAR) is aimed at egregious tax avoidance schemes designed by boutique firms specifically to engineer a reduction of tax liability not in keeping with the true economic results of the transaction. Whether or not it will impinge on ordinary commercial transactions remains to be seen.
IHT: limiting the deduction of liabilities
In calculating IHT, relief for debts is
available in most instances. Where it is necessary to determine
which asset has its value reduced by a debt, it is generally the
asset against which the debt has been charged or secured.
With effect for transfers or deaths occurring on or after the date
of Royal Assent to the Finance Bill 2013, it is intended that
certain restrictions or conditions are applied as follows.
- A deduction for a liability will only be allowed to the extent that it is repaid to the creditor, unless it is shown that there is a commercial reason for not repaying the liability and it is not left unpaid as part of arrangements to obtain a tax advantage.
- No deduction will be allowed for a liability to the extent that it has been incurred directly or indirectly to acquire property which is excluded from the charge to IHT. This is unless the property has since been disposed of or where the liability is greater than the value of the excluded property.
- Where the debt has been incurred to acquire assets on which an IHT relief such as business, agricultural property and woodlands relief is due, the debt will reduce the value of the assets that qualify for relief. Any excess liability over the value of the assets qualifying for relief will be allowable as a deduction against the estate in general, subject to the new rule about unpaid debts.
- Trustees as well as individuals will be subject to the new rules except that for trustees the unpaid liabilities rule will not apply to the calculation of the value for the purposes of the ten yearly anniversary charge.
Comment
When borrowing to invest in a business it
has been common practice for many years to secure the borrowings
against an asset which would otherwise be chargeable to IHT, such
as residential property. The business may well qualify for
business property relief and not be chargeable to IHT. The
residential property is chargeable to IHT, and therefore at present
benefits from a reduction in taxable value by having debt secured
on it. Such sensible arrangements now seem to be tarred as a
‘scheme’. Aside from tax efficiency, it may well
be easier to persuade a lender to advance debt, and on more
advantageous terms, if that debt is secured on bricks and mortar
rather than on an untested business.
If one of two joint owners of such a property dies, the loan
will not necessarily be repaid to the creditor, but could be taken
on by the survivor. In order for the loan to be deductible,
would this have to be classed as a ‘commercial’ reason
for non- repayment?
Where an employee benefit trust (EBT) has made a loan to a
beneficiary, the beneficiary may have used that to acquire an
asset, but if the beneficiary dies there would currently be a debt
in his estate to reduce the total value subject to IHT. If
the loan is not repaid when the beneficiary dies but perhaps waived
by the trustees, such arrangements would seem to be caught by the
new rules, unless it can be shown that there is a commercial reason
for not repaying the liability and it is not left unpaid as part of
arrangements to obtain a tax advantage.
There has been no advance warning of these proposed
restrictions, and these new rules are not open to public
consultation, so it is to be hoped that informed parliamentary
committee members will consider the commercial aspects.
Improving ‘Coding Out’
Currently, a maximum limit of £3,000 of underpaid PAYE or other self-assessment tax can be collected through PAYE via adjustment to an individual’s tax code. Consultation will take place on implementing a graduated scheme introducing higher maximum limits for those with higher earnings. The suggested maximum limit is £17,000 of tax on earnings of £90,000 or more.
It is also suggested that the underpaid tax could be split across tax years and still collected via a PAYE adjustment.
Comment
Although we await detailed proposals under the consultation, more flexibility in respect of ‘coding out’ is welcome with individuals often preferring the cashflow advantage of paying the tax on a monthly basis through PAYE rather than as a lump sum under self-assessment.
As the individual must be subject to PAYE, this will only be of advantage to those in employment or in receipt of a UK-based pension.
Anti-avoidance measures effective from December 2012
Amongst the avoidance measures announced in December 2012 were three corporation tax arrangements involving financial products and one arrangement covering both corporation tax and income tax concerning certain trade and property business deductions.
Tax mismatch schemes
These schemes sought to reduce a company’s liability to corporation tax through asymmetric tax treatment of loans or derivatives (tax mismatch schemes), including, although not limited to, schemes involving companies which are members of a partnership.
The new legislation takes effect for schemes (whenever entered into) on or after 5 December 2012, but does not apply to scheme profits or losses relating to a time before that date, nor to scheme profits that occur after that date but relate to a scheme entered into before that date.
The new legislation targets schemes which achieve the same effect as the target of the previous legislation, but which previously fell outside the definition of group mismatch schemes (possibly due to the use of partnership structures).
Property total return swaps
These schemes use property return swaps to convert capital losses within a group into income tax losses, and to generate capital gains which are not in proportion to those actually arising from the swap contract. Legislation will be introduced for accounting periods commencing on or after 5 December 2012 to amend the provisions for derivative contracts relating to land or certain tangible moveable property, the provisions for property based total return swaps and the meaning of relevant credits and relevant debits.
Manufactured payments
Stock lending arrangements were used in schemes where a company lent stock, and instead of receiving a manufactured payment which is taxable, for example as a trade receipt, received value in some other non-taxable form. Amending legislation will be introduced providing that the lender will be taxable when value representing a manufactured payment is received in any form, and has effect in relation to cases in which a dividend or interest is paid, or is treated as paid, on or after 5 December 2012.
Trade and property business deductions
Targeted anti-avoidance rules (TAARs) effective from 21 December 2012 will be introduced for income tax and corporation tax provisions governing the relationship between rules prohibiting and allowing deductions from profits of a trade or property business.
Prior to the changes certain business expenditure incurred by trades and property businesses that would otherwise be disallowable, could be deducted from business profits. The anti-avoidance legislation will introduce targeted rules that 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.
Comment
These measures are mostly a response to avoidance arrangements disclosed under the rules for disclosure of tax avoidance schemes (DOTAS). It will be interesting to see whether similar sorts of measures are required once the general anti abuse rule has been introduced.
Anti avoidance measures and loss relief
The Government has announced the introduction of a number of rules to target certain circumstances involving group relief, business reorganisations and the ability for companies to obtain loss relief.
- The group relief rules will be amended to increase the current threshold, which needs to be exceeded before losses can be surrendered under the group relief provisions to include any apportionment of profits to the surrendering company under the controlled foreign companies (CFC) rules. By way of example, this would mean that a company with current year management expenses would only be able to surrender them by way of group relief to the extent they exceed profits apportioned under the CFC provisions.
Broadly, the changes to the group relief rules will have effect for group relief surrender periods ending on or after 20 March 2013.
- For changes in ownership of a company that occur on or after 20 March 2013, legislation will be amended to disallow trading losses in certain circumstances involving a transfer of trade. Broadly, the proposed changes are to combat unconnected parties acquiring companies where it is possible to influence or predict when reliefs, deductions, allowances and expenses will crystallise for that company.
Furthermore, legislation will be introduced to restrict the availability of non-trading debits, non-trading loan relationship deficits and non-trading losses on intangible fixed assets after a change of ownership of a shell or dormant company.
Comment
These anti-avoidance rules target loss relief in specific circumstances and so their impact is expected to be relatively limited. Further information is expected to be published on 28 March 2013, so the specific impact of the new rules will have to be assessed at this point.
Corporation tax deductions for employee share acquisitions
In 2003, specific statutory relief was introduced for awards of qualifying shares and the exercise of qualifying share options. In both cases, the shares had to be shares in the employer or, in a group situation, in the parent company. These rules do not cover, for example, the award of shares or options in a company outside of the group. At the same time the new relief was introduced, a change in accounting standards introduced by FRS 20 and latterly IFRS 2 required companies to make deductions for the grant of share options. This resulted in two potential grounds for claiming deductions for share options – one specific statutory provision for qualifying shares and one based on general corporation tax principles in respect of the grant of the option itself.
The 2013 Budget introduces new, more detailed, rules for accounting periods ending on or after 20 March 2013. The broad effect of these rules will be to ensure that only the specific statutory deductions envisaged by the Corporation Tax Act 2009 for such awards will apply, rather than deductions available under general corporation tax principles.
The denial of a corporation tax deduction will also be extended to cover deductions for share option awards where the option is not in fact ever exercised.
Comment
The proposed new provisions have been introduced to supposedly clarify the law. Although the new legislation does render the position more certain, it follows the interpretation as adopted by HMRC which has, and continues to be, contested.
The position concerning all unexercised options (whether or not of qualifying shares) has been affected in that relief is explicitly denied but the position concerning the acquisition of non-qualifying shares has been left unchanged.
Review of Partnership Tax Rules
The 2012 Autumn Statement included an announcement of a review of the tax rules applying to partnerships as these had been identified as a ‘high risk’ area. It is now confirmed consultation on two specific aspects to counter their use to secure tax advantages.
- the use of limited liability partnership (LLP) to disguise employment relationships; and
- the artificial allocation of profit/loss.
New legislation will be introduced in Finance Bill 2014.
Comment
Under current legislation, members of an LLP are regarded as self-employed and as such no employer’s national insurance contributions are paid on their profit share. The consultation will specifically concentrate on measures to remove the presumption of self-employment where the use of an LLP has been used to disguise employment relationships.
Current legislation enables profit/loss allocations of LLPs to be allocated amongst all members as they so wish. The consultation will look to introduce measures to counter the perceived manipulation of profit/loss allocations to secure tax advantages which could for example be achieved through the differing tax rates which apply to, for example, corporate and individual members.
International agreements to improve tax compliance
The Government will include legislation in Finance Bill 2013 to implement the UK-US Agreement to improve international tax compliance and to implement FATCA.
The Isle of Man, Guernsey and Jersey have agreed to enter into similar automatic exchange agreements with the UK. HMRC has set up disclosure facilities with the Isle of Man, Guernsey and Jersey to allow investors to come forward and regularise their past tax affairs in advance of information being automatically exchanged.
Comment
This is all part of an international initiative to improve transparency and facilitate the exchange of information relating to taxpayers’ financial affairs.
Offshore evasion strategy
A document was issued on 20 March outlining the Government’s strategy for tackling offshore evasion. Offshore evasion is described as “using a non-UK jurisdiction with the objective of evading UK tax. This includes moving UK gains, income or assets offshore to conceal them from HMRC; not declaring taxable income or gains that arise overseas, or taxable assets kept overseas; and using complex offshore structures to hide the beneficial ownership of assets, income or gains.”
While there is no clear view of the cost of offshore evasion, HMRC’s recent progress through exchange of information agreements and disclosure facilities (such as the Liechtenstein disclosure facility and the UK-Swiss agreement on tax cooperation) indicates that it has a significant cost to the UK.
The strategy therefore aims to build on the existing approach with renewed commitment to clamping down on those who conceal income, assets and gains overseas to evade tax by ensuring:
- there are no jurisdictions where UK taxpayers feel safe to hide their income and assets from HMRC
- would-be offshore evaders realise that the balance of risk is against them
- offshore evaders voluntarily pay the tax due
- those who do not come forward are detected and face vigorously enforced sanctions
- there will be no place for facilitators of offshore evasion.
Comment
These aims build on the success from current initiatives, as well as global initiatives currently underway through the G20, OECD, the global forum on transparency and exchange of information for tax purposes and action through the EU and joint international tax shelter information centre. They all point to a new approach of international corporation that could see an evolution from the principles of the House of Lords 1955 case Government of India v Taylor, which held that the courts of one country should not enforce the penal and revenue laws of another country, to one where a co-operative approach in such areas becomes the norm.
Penalties in avoidance cases
The Government will consult this summer on a package of information powers, penalties and other measures, including the possible use of ‘naming and shaming’, for tackling the behaviour of high-risk promoters of tax avoidance schemes.
It will also cover a penalties based approach to taxpayers who fail to settle with HMRC in circumstances where an avoidance scheme has been defeated in another party’s litigation through the courts.
The intention is to enact legislation in Finance Bill 2014.
Comment
This is a further example of HMRC’s drive to increase the disincentives for undertaking contrived tax avoidance.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
