Budget 2007: Anti-avoidance measures prove evasive. By Louise Druceby
Anti-avoidance measures announced in the budget aim to raise just under £1bn but are proving increasingly obscure for most accountants.
The provisions extend the revenue’s attack on avoidance schemes and demonstrate the effectiveness of its disclosure of tax avoidance schemes’ (DOTAS) requirements, with the intent of preventing companies from buying other companies and obtaining a tax advantage through accessing the target company’s gains or losses.
They are also designed to prevent the operation of specific avoidance schemes and to extend existing anti-avoidance rules in this area.
However, anti-avoidance has now become so niche, many accounts will not have encountered any of these schemes in practice and will probably struggle to work out what they are referring to or trying to say, argues Richard Murphy, director of Tax Research LLP.
The main provisions are:
Loss buying: This targets companies seeking to buy tax losses from loss-making corporate members of the Lloyds insurance market who are ceasing their underwriting activities. The measures will stop companies gaining access to group relief after the losses are known but before they are recognised for tax purposes.
This is a very particular anti-avoidance measure to prevent a scheme that relied on the unusual timing of the recognition of losses for Lloyds insurance business and is relatively rare.
Sale of lessor companies: These proposals will counteract various arrangements that were designed to reduce or cancel the effect of the sale of lessor companies introduced in the Finance Act 2006. The previous legislation was intended to deter a sale motivated by an amount of income and expenses calculated through reference to the balance sheet value of the least asset where a change in the ownership or control of a lessor company occurred. These proposals have been introduced as a result of a number of disclosures under the DOTAS regulations.
Stamp duty land tax: Anti-avoidance measures were announced in the pre-budget report last December and the resulting regulations will now be enacted as part of the Finance Bill 2007. The provisions will incorporate a number of changes in response to the amendments raised after the December announcement.
Capital gains tax: Draft legislation was published in December to introduce a targeted anti-avoidance rule to counter schemes to create and use artificial capital losses to avoid tax. The measure will allow that capital losses are restricted to those arising from genuine commercial transactions.
Tax avoidance using employee benefit trusts: The proposed changes restrict the value of any deduction from an employee benefit contribution. This is the amount actually paid or transferred to the employee within nine months of the end of the relevant accounting period in a form that gives rise to income tax and national insurance charges.
Schemes have been developed which attempt to side-step these rules. Rather than making a payment to a mediatory such as an employee benefit trust, employers declare a trust over assets which they already control, such as the funds held in a bank account, and subsequently make a tax deduction to the value of that declaration.
“Overall, the anti-avoidance schemes are highly esoteric and, in most cases, created by highly specialist firms,” says Murphy. “How many people are buying the losses of Lloyds traders who have ceased and are now looking to sell to a continuing trader? We are talking about maybe five deals.
“The provisions, which were incredibly wide in 2004, are now incredibly narrow because the broad thrust of the scheme is actually having the desired effect. So instead of these rules now affecting a wide range of accountants, they are only affecting a few who are dealing with very specialised market sectors.”
However, he adds: “What the measures do prove is that the revenue continues to be serious about anti-avoidance. They are increasing the range of notification issues and the penalties.”