REV BN 20: Double Taxation Relief Anti-avoidance
Who is likely to be affected?
1. Anti-avoidance legislation is introduced with effect from today to provide a generic response to counter highly contrived schemes or arrangements that give rise to excessive double taxation relief (DTR) claims. Other legislation announced today sets out the basis on which claims to DTR should be computed generally for trading and similar income (REV 19).
2. Most companies, individuals and partnerships do not use schemes or arrangements to create excessive DTR claims so they will not be affected by this anti-avoidance legislation.
3. Any company, individual or partnership that enters into such a scheme or arrangement to claim DTR with tax avoidance as one of their main purposes may be affected if the scheme or arrangement falls within one of the five prescribed circumstances described below. The legislation will only apply where the Inland Revenue issue a notice to direct that it does and the total of the credit claimed for foreign tax in any one year, including that claimed by any connected persons, is not minimal. Further, the legislation will only apply to claims for underlying tax relief in limited circumstances. The legislation is described in more detail from paragraph 5 below.
4. Separate legislation is also being introduced today to
target two known avoidance schemes exploiting the legislation
for relief of underlying foreign taxes. The first scheme seeks
to circumvent the controlled foreign company (CFC) legislation
and the second to obtain credit for underlying foreign tax
on income
treated as dividends in the UK, but for which the foreign
payer gets a deduction as interest. Further detail of these
provisions is given from paragraph 15 below.
General description of the anti-avoidance measure
5. This anti-avoidance legislation will apply only if at least one of five circumstances specified in legislation applies. These circumstances and other aspects of the legislation are explained in greater detail in draft Inland Revenue guidance published today. Where the legislation applies, it cancels the increase in DTR that results from the scheme or arrangement.
6. Where the conditions for the legislation to apply are met, the Inland Revenue will issue a notice directing the taxpayer to self assess their tax liabilities taking into account the legislation. The notice will also give the Inland Revenue’s view of what effect the legislation should have on the self-assessment.
Operative date
7. For most purposes the legislation will take effect from Budget Day. This 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 (such as “dividend buying” where extra income is deliberately bought and the DTR claimed to be due is more than the UK tax due on that income).
Legislation
8. Where a taxpayer claims relief for foreign tax as part of a scheme or arrangement with tax avoidance as its main purpose or one of its main purposes, and where the scheme or arrangement falls within the prescribed circumstances described below, then the DTR claim will be limited so as to cancel the effect of the scheme or arrangement.
9. The prescribed circumstances in which the legislation
will apply are where
one or more of the following are true:
- the foreign tax is not properly attributable to the source from which the income is derived
- the payer of the foreign tax and any person associated with the transactions have not together suffered the full cost of the foreign tax
- a claim or election that could have been made and which would have reduced the foreign tax credit eligible for relief was not made, or a claim or an election that was made increased the amount of relief
- the foreign tax credit reduces the tax payable to less than would have been due if the transaction had not occurred
- the income subject to foreign tax was acquired as consideration for a tax deductible payment
10. In the case of underlying tax, the legislation will apply
only where, had the foreign company that paid the foreign
tax been UK resident and made a claim for credit for that
foreign tax, the legislation would have applied to the foreign
company. This means that tax avoidance would have been one
of the main purposes and the scheme or arrangement would have
fallen within at least one of the five prescribed
circumstances.
11. When the legislation applies, the Inland Revenue will issue a notice directing that it does. The taxpayer must take their own view on how the legislation should apply and self-assess, or amend an existing self-assessment, in the normal way.
12. In the event that a taxpayer does not agree with the Inland Revenue’s view of the application of the legislation, the issue will be resolved in the normal way through the self-assessment enquiry and appeals procedures. An appeal can challenge whether the conditions required to trigger the legislation were met or what the effect of applying the legislation should be.
‘Discovery’ notices
13. When the period in which the Inland Revenue may enquire into a return has closed, it may issue a notice in certain circumstances. This will apply either where the inability of the Inland Revenue to issue a notice was due to the fraudulent or negligent conduct of the taxpayer or certain other associated persons, or where the Inland Revenue could not reasonably have been expected to realise that a notice should have been issued based on the information available to it.
Penalties
14. No penalty is due if a notice is not issued before a return was made as in such circumstances the return cannot be incorrect. Once a notice has been made directing that the legislation applies, penalties can arise if the taxpayer fraudulently or negligently fails to take account of the legislation within a period of 90 days from the issue of the notice. No penalty would arise, however, where the taxpayer takes a reasonable and tenable view that the legislation did not apply and accordingly takes no account of it in their return.
Targeted Action on Underlying Tax Schemes
15. Where a foreign jurisdiction taxes companies on a consolidated basis, Section 803A ICTA treats all group companies in that jurisdiction as a single entity. Avoidance schemes notified under the avoidance disclosure regime have sought to exploit this legislation to circumvent the controlled foreign company (CFC) legislation. Consequently, changes will be made with effect from today to the operation of this provision to limit its scope so that it does not apply to a CFC for which exemption is available under the acceptable distribution policy (ADP) test.
16. Further disclosures have concerned schemes that seek to make use of the fact that certain payments may be characterised as interest for tax purposes in another jurisdiction but as a dividend under UK law. The payer obtains a tax deduction for the payment in the other jurisdiction, but in the UK credit for underlying tax is given against the receipt.
17. With effect from today no underlying tax relief will be given if a tax deduction is given in another jurisdiction calculated by reference to the amount of the dividend.
18. More detailed guidance on these underlying tax changes is available on the Inland Revenue website from today.
Further advice
19. If you have any questions about either the anti-avoidance legislation or the specific underlying tax changes, please contact Andrew Page on 020 7147 2680. Further information about these and other Budget measures are available.
Home Top | Menu
