PN 3 - Protecting Tax Revenues

5 December 2005

A package of measures aimed at tackling tax fraud and avoidance was announced by the Chancellor today. These measures will protect the tax system from abuse and ensure that an unfair burden does not fall on the vast majority of taxpayers who pay their fair share.

The measures, which will protect revenue for investment in public services, are targeted at tax fraud and avoidance. Many of the measures have been informed by the disclosure rules introduced in Finance Act 2004, which allow HM Revenue and Customs (HMRC) to identify and target specific risks to the tax system. The package includes an announcement, building on the success of the disclosure rules, to ensure the disclosure rules will continue to enable HMRC to identify and tackle
risks as they arise.

Details

Disclosure regime

To build on the success of the disclosure regime, introduced in Finance Act 2004, the Pre-Budget Report announces:

• proposals to improve the effectiveness of the ‘filters’ for direct tax to ensure they reflect recent developments in avoidance behaviour;
• the extension of the regime to cover avoidance risks across all of income tax, corporation tax and capital gains tax, allowing HMRC to take further targeted action against avoidance while minimising burdens for the compliant; and
• that businesses will be required to provide information on direct tax schemes and arrangements devised ‘in-house’, within 30 days of implementation, bringing them more in line with the rule for promoters.

HMRC will be discussing the changes with stakeholders. The changes will be effective from April 2006 and will allow HMRC to continue to respond swiftly and proportionately to tax avoidance.

Sale of lessor companies

In response to increasing tax-driven activity in this area, changes have been announced to the way that lessor companies are taxed when they change ownership. Groups have benefited from capital allowances in the early years of a lease, before selling lessor companies to loss-making groups to avoid paying tax on the subsequent profits.

This measure, effective from 5 December, imposes a charge on the leasing company on the day that it is sold in order to recover the tax benefits that have been taken, and grants an equal relief on the day after the sale. It should not deter commercially driven sales.

Corporate capital losses

Targeted anti-avoidance rules will be introduced with effect from 5 December to ensure that capital losses can only be created and used as a result of genuine commercial transactions. This responds to information received under the disclosure regime highlighting transactions artificially structured to gain a tax advantage. The introduction of rules with a more purposive-based approach will enable the repeal of some existing mechanical provisions.

Financial avoidance using stock lending arrangements

A scheme reported under the disclosure rules that allows companies or persons to avoid tax on interest using a stock lending arrangement will be blocked. This measure is targeted at avoidance of tax on interest on cash deposits, using a stock lending arrangement with non-commercial terms.

For arrangements entered into from 5 December, the taxpayer will be treated as receiving interest at a commercial rate on their cash.

Taxation of corporate intangible assets

With effect from 5 December, avoidance schemes involving corporate intangible assets will be blocked.

Groups of companies have been using schemes to artificially generate tax relief by moving rights in existing intangible assets around a group. This measure will ensure the regime for intangible assets functions as was intended at its introduction in 2002.

Capital gains: policies of insurance

The tax rules for capital gains will be changed to clarify that capital losses arising on disposals of certain insurance policies, including capital redemption policies, cannot be deducted from capital gains in order to reduce or eliminate liability to tax. The changes respond to information received under the disclosure rules and are effective from 5 December.

Transfer of assets abroad

Action is being taken to stop UK-resident individuals avoiding tax by exploiting offshore companies and trusts. Changes to the transfer of assets abroad legislation will tighten the rules for exemption from liability and close loopholes with effect from 5 December.

Inheritance tax avoidance

Targeted anti-avoidance measures to tackle contrived inheritance tax (IHT) avoidance schemes will take effect from 5 December. These measures are designed to counter:

• avoidance involving second-hand interests in foreign trusts; and
• the use of artificial trust arrangements to escape both the IHT “gift with reservation” rules and the "pre-owned assets" income tax charge.

Missing Trader Intra-Community (MTIC) VAT Fraud

The Government remains determined to tackle MTIC fraud, and the criminals perpetrating it, and is taking steps to strengthen its strategy. HMRC is intensifying its operational activities throughout the UK and its cooperation with other countries to combat this fraud. In addition the Government will not hesitate to bring forward further legislation if necessary.

Tobacco smuggling

New initiatives to build on the success of HMRC’s strategy for tackling tobacco smuggling have been announced, including:

• enhanced agreements between HMRC and tobacco manufacturers, which will further restrict the availability of tobacco to smugglers;
• consultation on new measures to strengthen protection for consumers from counterfeit tobacco; and
• a new approach to tackling smuggling of hand-rolling tobacco (HRT), involving new legislation to impose better controls on the supply chain for HRT plus the deployment of 200 staff to underpin these new controls.

Oils fraud

To strengthen further the UK oils strategy, the Government today announced an increase in duty rate for rebated gas oil (‘red diesel’) of 1.22 pence per litre (ppl). The change, which takes effect from midnight, 5 December, will narrow the differential with main duty rates, reducing incentives for fraud. The Government’s oil strategy aims to reduce oils fraud from 6 per cent of the Great Britain diesel market in 2001 to no more than 2 per cent by March 2006.

Changes to the categories and definitions of those vehicles eligible to use rebated oils are also announced, which will improve clarity and reduce the scope for unintended revenue leakage. A summary of responses to the consultation launched at the 2004 Pre-Budget Report is also published today.

Exchange of information on indirect taxes & ratification of OECD/Council of Europe Convention on Mutual Administrative Assistance.

Bilateral agreements with non-EU countries regarding the exchange of information on indirect taxes and the ratification of the Council of Europe-OECD 1988 Convention on Mutual Administrative Assistance in Tax Matters will be sought by the UK.

These changes will complement Government’s promotion of exchange of information as an effective means of tackling avoidance and evasion of direct taxes.

Notes For Editors

Further information is published on the HM Revenue and Customs website