PN 3: Protecting Tax Revenues

A package of measures to tackle tax fraud and avoidance was announced by the Chancellor today. The reforms will protect revenue for investment in public services and ensure that an unfair burden does not fall on the vast majority of taxpayers who pay their fair share.

A number of the measures have been informed by the disclosure rules introduced in 2004. These provide early warning of avoidance schemes, enabling the Government and Revenue Departments to respond to avoidance in a targeted manner, whether by means of legislation or litigation, without creating unnecessary burdens for compliant taxpayers. The Revenue Departments continue to analyse disclosures received and further action will be taken as and when appropriate.

Details

Disclosure rules

The disclosure rules require promoters or users of certain tax avoidance schemes or arrangements to provide information to the Revenue Departments. Building on the success of the disclosure rules, the Chancellor today announces 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.

Avoidance through arbitrage

A measure is being introduced with effect from today 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 and has been targeted to impact only where a UK tax advantage is sought. The legislation will only apply if the Inland Revenue issue a notice and will notapply if the tax reduction is minimal. The Inland Revenue is publishing detailed guidance and will provide informal clearances from today.

Abuse of double taxation relief

In line with the announcement on double taxation relief (DTR) in the 2004 Pre-Budget Report, a new measure is being introduced to prevent tax avoidance schemes that exploit DTR rules. The legislation takes effect from today 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 gives effect to the announcement made on 10 February 2005 that claims would 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.

Tax on capital gains

Three new measures to counter avoidance of tax on capital gains are being introduced with effect from today. The new rules will:

• ensure that trustees of settlements who are UK resident for capital gains tax purposes for only part of a tax year cannot exploit certain double taxation agreements to avoid UK tax;
• ensure that individuals cannot exploit certain double taxation agreements to avoid UK tax on capital gains realised while they are temporarily non-UK resident for tax purposes; and
• expand the range of assets that are treated as located in the UK for the purposes of tax on capital gains.

Financial products

A package of measures targeting avoidance by companies and individuals using financial products is being introduced with effect from today. This builds on the closure of two schemes with immediate effect on 10 February 2005. 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 introduced today puts beyond doubt that 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, does not work.

Corporate intangible assets

A marketed avoidance scheme for the corporate intangible assets regime is being blocked with effect from today. 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.

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, will be blocked with effect from tomorrow. 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.

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.

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.

Tobacco strategy

Tobacco smuggling involves serious widespread criminality and costs over £2.5 billion a year in lost revenue. Since the launch of the 'Tackling Tobacco Smuggling' strategy in 2000, the illicit cigarette market has been reduced to 15 per cent, down by more than a quarter from its peak.

The Government's aim is to reduce the smuggled market share still further. As part of this effort, the Government will continue to target the increasing numbers of counterfeit cigarettes being sold. More than half the cigarettes now being seized are counterfeit, and many are made with tobacco leaves contaminated with cadmium and arsenic, posing additional risks to smokers. The Government is also considering further action to tackle smuggling of hand-rolling tobacco with a view to announcing a package of further measures later in the year.

Alcohol strategy

Further details of the duty stamps scheme, being introduced in 2006 to tackle spirits fraud, were announced today. The scheme is a vital part of the Government's strategy for tackling alcohol fraud, and is designed to be tough on spirits fraud while minimising compliance costs for legitimate businesses. Following close consultation with the industry, the Government has decided:

• that the benefits of duty stamps can be delivered without attaching financial liability to the stamps;
• to provide targeted exemptions for mobile operators (such as ferries and airlines) and spirits of less than 30 per cent alcohol by volume;
• not to include a class exemption for liqueurs; and
• to adopt the industry proposal to allow stamps to be incorporated into bottle labels and to do so in a way that allows them to be printed by the industry's own label printers. Businesses will have the option to use freestanding duty stamps.

Compliance costs for the scheme will be less than the estimates published in the 2004 Pre-Budget Report, without compromising the effectiveness of the scheme.

UK oils fraud strategy

To support further the UK oils fraud strategy the Government today announced an increase in duty of 1.22 pence per litre for rebated oils, with effect from 1 September 2005.

In 2003 oils fraud cost the Exchequer around £850 million in Great Britain. Introduced in Budget 2002 the strategy specifically targets the misuse of rebated oils and is a combination of new regulatory regimes and enhanced law enforcement activity. Today's announcement narrows the differential in duty rates between rebated oils and main road fuels, reducing incentives for fraud by significantly reducing fraudsters' profits.

Notes for editors

Further information can be found in the Budget Notes and other documents published on the Inland Revenue and HM Customs and Excise websites.