Simplifying anti-avoidance legislation - Chapter 2: Specific reviews

Review of the 'Transactions in Securities' legislation (Sections 703 to 709 ICTA and Chapter 1 Part 13 ITA)

1. The Transactions in Securities legislation at sections 703 to 709 ICTA and Chapter 1 Part 13 ITA (hereafter 's703') was identified by business as a priority for simplification.

2. Business and advisers have told HMRC that the key problem with s703 is the administrative burden it causes, primarily due to its potentially wide scope, which gives rise to uncertainty. HMRC's emerging ideas to tackle this problem centre on introducing a more targeted approach. The ideas are:

  • consideration of a wholesale repeal of the current legislation to be replaced with Targeted Anti-Avoidance Rules;
  • looking at a more modest set of amendments repealing the more complex parts of s703 and replacing them (or those that need replacing) with more modern equivalents. A possibility is to look at the ideas coming out of the review of unallowable purpose tests;
  • reviewing the clearance regime to see if it can be amended so that clearance applications are made only where there is genuine uncertainty over whether the Transactions in Securities legislation applies to proposed transactions;
  • setting out in clear terms the behaviours that s703 is expected to counter and writing detailed guidance on the application of the Transactions in Securities legislation (whether or not the legislation is amended); and
  • investigating how the Transactions in Securities legislation can be incorporated within the self-assessment regime.

3. An important feature of all of the above is to identify the Exchequer risks that s703 currently protects against, and to address them in a more targeted way.

Review of 'unallowable purpose' tests in tax legislation

4. Business and advisers have told HMRC that they find it difficult to understand current anti-avoidance purpose rules, both in terms of when they apply and the effect they have if they do apply.

5. These rules are intended both to deter and to counteract avoidance. They also help to reduce the volume of legislation that would otherwise be necessary to address specific avoidance activity.

6. Each anti-avoidance purpose rule has its own unique wording but there are substantial similarities between many of the rules and usually the wording appears generally to be addressing broadly similar situations.

7. There are generally three key parts to such purpose rules:

  • the test of purpose;
  • the definition of tax advantage; and
  • the action triggered.

8. Initial thinking on options for alignment has suggested:

  • alignment of the test of purpose;
  • alignment of the definition of tax advantage;
  • alignment of the action triggered; and
  • a purpose test, definition of tax advantage and set of actions triggered that are utilised in a modular way by specific anti-avoidance purpose rules.

9. HMRC plans further work to explore whether, and to what extent, alignment of anti-avoidance purpose rules would be both possible and desirable as well as identifying any associated benefits.

10. Examples of four specific rules that illustrate the different types of purpose tests are:

  • Paragraph 13 Schedule 9 to the Finance Act 1996;
  • Section 123(4) of the Capital Allowance Act 2001;
  • Paragraph 23 Schedule 26 to the Finance Act 2002; and
  • Section 737 of the Income Tax Act 2007.

Review of certain rules relating to shares acquired by employees (Part 7 of the Income Tax (Earnings and Pensions) Act 2003)

11. One of the areas identified for review by HMRC in the Budget update was certain rules relating to securities acquired by employees in Part 7 of the Income Tax (Earnings and Pensions) Act 2003.

12. Since the issue of the Budget update, work within HMRC has identified a number of areas that may give rise to possible candidates for simplification as part of this review. These include the following:

  • sale of securities purchased by instalments - removing the Chapter 3C tax charge that arises where there has been a sale or disposal of securities if the notional loan created under Chapter 3C is repaid in full;
  • release from obligation to pay for securities by instalments - aligning the tax treatment of notional loans arising under Chapter 3C with the beneficial loan provision in s188 ITEPA 2003 (Loan released or written off: amount treated as earnings);
  • sale of nil or partly paid securities - removing the Chapter 3C tax charge in relation to outstanding notional loans that arises where securities are sold by employees and that employee has paid the full market value for securities they sold;
  • securities acquired for less than market value subject to replacement or additional securities - extending s421D(3) ITEPA 2003 to cover securities subject to Chapter 3C so that scrip issues do not create a charge under Chapter 3C or in other cases only a proportionate amount is brought into charge;
  • share identification rules for employment related securities - some employees take part in a number of different arrangements whereby they obtain shares in their employing company. Consequently, companies need to identify the shares when, for example, they are sold. In practice companies are allowed to use their own rules as long as they are reasonable and consistent, but there is no clear guidance in the legislation. One idea is to consider whether there is any merit in using the rules for identifying shares for capital gains purposes as a basis to create a statutory approach to identifying securities for employment related securities.

13. The questions in Chapter 3 seek views on the list of possible candidates identified above.