2003 Pre-Budget Report

PN 6

10 December 2003

TACKLING TAX AVOIDANCE

A series of measures to protect tax revenues from fraud, evasion and avoidance were outlined in the Pre-Budget Report today.

Paymaster General Dawn Primarolo said:

"The measures announced today demonstrate the Government's determination to tackle tax avoidance and create a fair environment for all."

DETAILS

Trusts

From 6 April 2004 the tax rate paid on the income and capital gains of trusts will increase from 34 per cent to 40 per cent (and the corresponding dividend trust rate from 25 per cent to 32½ per cent). This removes a distortion that provides avoidance opportunities for some higher rate taxpayers, but will not affect the position of tax payers not liable at the higher rate who receive income from a trust, who will continue to be able to reclaim any excess income tax paid by the trustees on their behalf.

In order to reduce compliance burdens for small trusts, the Government will be consulting on a modernised income and capital gains tax regime for trusts. In particular the Government will aim to reduce the tax burdens on smaller trusts and to ensure that trusts established to protect the vulnerable are not disadvantaged by the tax system. The Inland Revenue will publish details of the modernisation proposals tomorrow.

With immediate effect, the capital gains "gifts relief" legislation will be amended to counter tax avoidance schemes that involve the transfer of assets into a trust. Draft clauses for this change are being published today on the Inland Revenue website together with draft Explanatory Notes. This legislation will be included in Finance Bill 2004.

Action will also be taken against avoidance of the Inheritance Tax rules for Gifts with Reservation, where the former owner continues to enjoy the benefits of ownership of an asset. Finance Bill 2004 will legislate to impose a charge on the benefit gained from using the asset, following consultation on the detailed workings of this measure.

Construction industry

The Inland Revenue is increasing compliance activities in the Construction sector to ensure that everyone understands and meets their tax obligations. To tackle non-compliance in the construction industry by contractors routinely ignoring their responsibilities both as contractors and employers, and by sub-contractors using artificial schemes. As part of the reform of the Construction Industry Scheme, there will be a new employment status declaration for contractors, and the Inland Revenue will be increasing its compliance activities in this sector to ensure that all involved understand and meet their tax obligations.

Film Tax Relief

Film Tax Relief has encouraged a substantial amount of investment in UK films, much of which occurs because the investors enjoy immediate tax relief on the purchase or production of the film with the expectation that they will pay tax on income received from the film in subsequent years. However, the tax avoidance industry has marketed schemes to allow investors to convert the tax deferral into a permanent tax advantage. From today, where an investor exits from a film business in a way that gives rise to an unwarranted tax advantage, they will be subject to a charge that will remove the advantage. Details of the proposed legislation are published on the Inland Revenue website.

Payments to employees by third parties connected to the employer

The law will be clarified in cases where connected third parties, such as companies in the same group as the employer, make payments to employees. Regulations will be laid before Parliament shortly to ensure these payments cannot be treated as gratuities exempt from National Insurance Contributions. These changes will not affect tips paid to waiters and others in similar employment.

Foreign Earnings Deduction (FED) for Seafarers

The FED provides a 100 per cent tax relief to encourage UK seafarers to work on UK deepwater vessels, which could be called upon in times of conflict. However, the relief is currently being exploited by some oil and gas workers on offshore installations around the world, to receive a tax relief that was never intended for them. Steps will be taken to make clear that employees working on offshore installations are not entitled to claim this relief. This will take effect from 6 April 2004.

Gift Aid relief

Improvements to the Gift Aid scheme introduced in Budget 2000 have had the unintended effect of widening the impact of the special statutory exemption available to some heritage and conservation charities. As a result, these charities have introduced schemes that grant free day admission in return for a donation that attracts Gift Aid. The Government is determined to maintain the integrity of the Gift Aid scheme and intends to take steps to close this loophole in the legislation in Finance Bill 2004. The details of the measure will be discussed with the charities concerned.

VAT on assigned debts

The Government is introducing new rules to prevent VAT avoidance on debts assigned by companies to connected businesses, protecting some £20 million VAT a year. Businesses that are not paid by their customers for goods and services are able to claim from Customs the VAT they charged, but have been unable to collect. Normally the VAT is repaid to Customs if the business subsequently receives payment from its customer, but this does not apply where the debt has been assigned to another business.

Legislation effective from 11 December prevents an avoidance scheme where businesses assign debts to connected businesses in order to retain any VAT subsequently paid to them.

VAT: abusive grouping

A paper Tackling VAT group abuses will be issued shortly, setting out proposals for a new legislative definition of eligibility to join a VAT group, based on accounting standards for consolidating subsidiaries in group accounts. The new criteria will focus on the realities of control and economic benefit to determine whether VAT grouping should be allowed. As well as providing greater certainty to taxpayers, the new rules will help tackle abuses of VAT groups through artificially contrived grouping arrangements.

Partial exemption

Partly exempt businesses (which make both taxable and VAT exempt supplies) may use either a standard method or a bespoke method to calculate the VAT that they are entitled to reclaim from Customs. Where a bespoke method gives an unfair or over-generous result, Customs cannot terminate that method unless they have already prepared a fairer method or negotiated one with the business.

Legislation, to take effect from 1 January 2004, will allow Customs to set an effective date from which they can correct the effects of unfair methods. This will help to ensure that sensible negotiations of new, fairer methods take place in a timely manner, helping to prevent losses of some £50 million a year under the current rules caused by deliberate delays in reaching such agreements, in a way that will not affect compliant businesses.

Tackling VAT losses

The Government is extending the VAT strategy launched last year, with a further 450 staff to be deployed over the next two years, in particular to improve assurance activity and recover debts from wilfully non-compliant businesses.

Protecting Indirect Tax Revenues, published alongside the 2002 Pre-Budget Report, set out the Government's strategic approach to measuring and reducing indirect tax losses as a result of fraud, smuggling and other non-compliance. The VAT strategy aimed to reduce losses by £2 billion a year by 2005-06. The Pre-Budget Report announces a further 450 Customs staff to be deployed over the next two years, to increase assurance activity and improve collection of unpaid debts. Additional specialist staff will also help to ensure that areas presenting significant revenue risks are identified and addressed earlier. The extension to the package is expected to produce an additional £185 million in 2004-05, rising to £315 million in 2006-07. Further details and updates on the strategic approach can be found in Measuring and tackling indirect tax losses on the Customs website.

Alcohol strategy

Alongside the strategies for tackling VAT, tobacco and oils fraud, the PBR now launches the first comprehensive strategy to tackle alcohol fraud:

• introducing new controls for better regulation of the alcohol regime during 2004;
• making preparations for the implementation of the Roques report recommendation to apply tax stamps to bottles of spirits to aid identification of illicit spirits currently being sold to unwitting customers in ordinary retail outlets at normal prices, despite not having tax paid on them; and
• setting HM Customs & Excise a target to reduce substantially the illicit share of the spirits market.

The Government plans to bring forward legislation for the tax stamps proposal in Finance Bill 2004. However, it will also consider any new proposals the spirits industry wishes to put forward in the coming months for alternative measures that would be as effective in tackling spirits fraud as tax stamps. Although the Government believes tax stamps constitute a necessary response to the problem of organised spirits fraud, it will also consider options for mitigating increased costs to the legitimate trade if tax stamps are implemented.

Details of the new regulatory controls, and of the invitation for alternative proposals to tax stamps, are set out in a Customs business brief published today, available at the Customs website. Plans for the implementation of tax stamps and draft legislation for the 2004 Finance Bill will be published in spring 2004, along with a draft Regulatory Impact Assessment. Details of the new target for HM Customs & Excise will be announced when setting PSA targets as part of the 2004 Spending Review.

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: 0845 300 3939

(office hours only)

HM CUSTOMS AND EXCISE PRESS OFFICE

Press enquiries: 020 7865 5095/5471 or 020 8929 4637

(out of hours:020 7620 1313)

GOVERNMENT DEPARTMENT INTERNET SITES

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

HM Treasury www.hm-treasury.gov.uk/index.cfm

Inland Revenue www.inlandrevenue.gov.uk

HM Customs and Excise www.hmce.gov.uk

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