PN07 - Fairness in Taxation - Protecting Tax Revenues

 

A package of reforms to tackle tax fraud and avoidance was unveiled in Budget 2003 today. The reforms will produce additional revenue, deliver significant savings and ensure that the burden of tax does not fall unfairly on taxpayers who play by the rules.

Central to today’s reform is the launch of a new compliance and enforcement package for direct tax and national insurance contributions (NICs). The package involves investment of £66 million over the next three years, and is expected to produce at least an additional revenue totalling £1.6 billion over the same period. The package is the first step in a new strategic approach for Inland Revenue compliance work, and is part of the Government’s ongoing commitment to create a modern and fair tax system. The additional resources will be deployed in three areas:

  • protecting the Exchequer from non-payment of tax and NICs debts and from failure to file tax returns;
  • tackling fraud involving concealment of undeclared income or profits offshore; and
  • countering avoidance of corporation tax and of NICs and tax on employment income.

Commenting on the compliance and enforcement package, Paymaster General Dawn Primarolo said:

“We want to make sure that the burden of tax does not fall unfairly on taxpayers who play by the rules and pay their fair share. This package is the first step in a new strategic approach to compliance work, designed to modernise the way risks to revenue are assessed and managed by the Inland Revenue. It identifies areas of the tax system where the potential loss of revenue is high and targets resources and compliance activity accordingly; and creates a more stable framework upon which to plan public investment”.

To complement this package, Budget 2003 also announces a range of further measures to tackle instances of direct tax avoidance, protecting around £250 million per annum in future years, including:

  • action to prevent tax and NICs avoidance through the payment of share-based renumeration;
  • measures to close loopholes in the chargeable gains regime for second-hand life policies and prevent avoidance of capital gains tax through complex transactions using offshore trusts;
  • steps to tackle avoidance though sale and repurchase agreements; new measures to close loopholes in the loan relationships and derivative contracts regimes; and
  • as announced in March, action to counter tax avoidance using relevant discounted securities and to prevent exploitation of the 100 per cent allowances for small business investment in information and communications technology (ICT).

Rapid financial market and regulatory changes are leading to the development of innovative debt instruments that are economically equivalent to equity. This creates particular challenges for the tax system. The Government will continue to monitor the market for these innovative debt instruments and, if appropriate, will consider with the industry any changes to their tax treatment needed to protect revenues.

Budget 2003 also restores the tax treatment of capital gains and losses on the exercise of options to that which was generally understood to apply before the judgement in the case of Mansworth v Jelley. The change will apply to options exercised on or after 10 April.

These measures complement the Government’s strategy for protecting indirect tax revenues, details of which were published alongside the 2002 Pre-Budget Report. To consolidate and build upon these existing strategies, Budget 2003 announces that the Government will:

  • introduce further measures to support the VAT strategy and to reduce instances of VAT fraud and avoidance; and
  • consult shortly on further measures to reduce opportunities for alcohol fraud.

Details

Inland Revenue compliance and enforcement package

The compliance and enforcement package for the Inland Revenue, announced in the Budget today, is the first step in a new strategic approach being developed by the Inland Revenue to manage the risks of non-compliance. The aim is to ensure that such risks are analysed systematically and high-risk areas clearly identified, that Inland Revenue responses are tailored to address them, that expected outcomes are clearly identified from the start, and that these are effectively monitored and evaluated.

Inland Revenue taxation anti-avoidance measures

To complement the compliance and enforcement package, the Government is taking action to close a number of direct tax loopholes. In addition to those already outlined above, these include:

  • action to prevent tax avoidance in connection with life insurance policies held in trusts;
  • steps to counter the abuse of the rules on part withdrawals from life insurance policies;
  • measures to remedy deficiencies in the taxation rules for life insurance companies; and
  • action to prevent tax and NICs avoidance by those engaging domestic workers through a service company.

VAT anti-fraud measures

To protect indirect tax revenue, the Government is introducing new VAT anti-fraud measures designed to:

  • impose, subject to safeguards, joint and several liability for payment of VAT on both the supplier and the recipient of supplies of specified goods and services;
  • allow Customs and Excise to deny recovery of VAT in circumstances where the taxpayer holds an invalid tax invoice and cannot further prove the bona fide nature of the transaction; and
  • extend existing security powers so that security can be required from any business involved in a VAT supply chain where there is evidence of actual or potential fraud or evasion.

VAT anti-avoidance measures

Budget 2003 introduces VAT anti-avoidance measures designed to:

  • prevent avoidance of VAT in relation to the private and non-business use of land and buildings;
  • prevent businesses from delaying, sometimes indefinitely, accounting for VAT on certain on-going supplies to connected businesses; and
  • following consultation announced in Budget 2002, prevent VAT losses through avoidance and leakage from the sale of face-value vouchers.

Notes for Editors

Inland Revenue compliance and enforcement package

An additional £66 million is being provided to the Inland Revenue over the next three years to support the compliance and enforcement package. The package is expected to produce at least an additional revenue totaling £1.6 billion over the same period, but in line with the Government’s cautious approach to the public finances a lower total figure of under £1.4 billion has been included in the forecast over these three years. The Comptroller and Auditor General has audited the projections and has concluded that they are based on a reasonable approach and incorporate caution.

Protecting VAT revenue

The Government published Protecting indirect tax revenue alongside the 2002 Pre-Budget Report. This set out the Government’s estimates of revenue losses within the VAT system and its strategy for tackling them. The strategy is designed to produce more than £2 billion a year in additional revenue by 2005-06. It explained that, of total VAT losses, VAT Missing Trader Intra-Community (MTIC) fraud is estimated to have cost between £1.7 and £2.75 billion in 2001-02; and the Government would consider further legislative steps to tackle the problem if required. The Government also allocated extra resources to identify and tackle abusive tax avoidance schemes, including tightening up legislation where necessary.

Further details of these measures can be found in the Budget Notes published today.

HM Treasury Press Office

Press enquiries: 020 7270 5238
Non-media enquiries: 020 7270 4558

Inland Revenue Press Office

Press enquiries: 020 7438 6692 / 6706 / 7327
(out of hours:
 07860 359544)
   
Non-media enquiries: 020 7438 6420/6425
(office hours only)  

HM Customs and Excise Press Office

Press enquiries: 020 7865 4775 / 5472
(out of hours: 020 7620 1313)
   
Non-media enquiries: 0845 010 9000 (National Advice Service)

Government Department Internet Sites

Further information and all published documents relating to the Budget may be found on the Internet at the following addresses:

   
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