Double Tax Relief
Relief for trade receipts
Legislation is to be introduced to deny excessive relief and clarify the law on the restriction for credit relief for foreign tax paid on income taxed in the UK as a trading receipt (such as interest and dividends received by financial traders and rental income from foreign properties). The proposed legislation will clarify which expenses and related transactions should be taken into account in determining the proportion of the net profit or loss attributable to the activity that gave rise to the foreign tax so that the credit for foreign tax paid is restricted to the UK tax on the profits (if any). The rules will apply from 16 March 2005 for companies and from 6 April 2005 for individuals. A transitional rule will apply, from 16 March 2005 to 31 December 2005, to relief for tax withheld from dividends so as not to deny relief for more than half of the foreign tax paid.

Anti-avoidance measures
The following three proposals to restrict double tax relief are to have effect from 16 March 2005.

• Where relief is claimed for foreign tax as part of a scheme or arrangement of which the main purpose (or one of the main purposes) is the avoidance of tax, the relief for double tax is to be limited so as to cancel the scheme or arrangement where it falls within one of five prescribed circumstances. For example, relief will be restricted where the foreign tax credit reduces the tax payable to less than the amount that would have been due had the transaction not occurred. The proposed provisions also apply to underlying tax where the legislation would have applied to the foreign company which paid the tax had that company been resident in the UK and made a claim for relief. The legislation will only apply where the total credit claimed in any one year is not minimal and the Revenue issue a notice to direct that it does. The taxpayer must then decide how the legislation applies and self-assess (or amend an existing self-assessment) as appropriate. The usual self-assessment enquiry and appeal procedures will apply and ‘discovery’ notices can be issued in certain circumstances.
• Where the provision which taxes a group of companies as a single entity (TA 1988, s 803A) applies, legislation is proposed to limit its scope so that it does not apply to a controlled foreign company for which exemption is available under the acceptable distribution test.
• Credit relief is to be denied for underlying tax in respect of income which is treated as a dividend in the UK but for which a tax deduction has been given in the foreign jurisdiction (where, for example, the payment has been characterised as interest).

Countering Film Tax Avoidance
As highlighted in the Pre-Budget Report, anti-avoidance measures are being introduced as follows to counter tax-avoidance schemes aimed at those producing or investing in films.

• From 2 December 2004 (unless the film was already in production at that date), only one person will be able to claim relief (under F(No 2)A 1992, s 42 or F(No 2)A 1997, s 48) for a qualifying British film, either for production expenditure or acquisition expenditure but not both.
• From 2 December 2004 (unless he has already entered into an unconditional agreement at that date), if a person claims film reliefs and enters into an agreement guaranteeing him income from the exploitation of the film, the reliefs will be restricted to the extent, if any, that guaranteed income will arise more than 15 years after the making of the agreement.
• To prevent groups of companies using ‘exit schemes’ intended to convert the deferral of tax via film reliefs into permanent avoidance of tax, companies will be required, where the disposal of film rights out of the group occurs on or after 2 December 2004, to treat the value of film rights (so far as not already taxed) as a trading receipt at the time of the exit event.
• To the extent that film reliefs for members of partnerships are already limited by reference to partners’ capital contributions to the firm, the rules are being tightened to disregard, from 2 December 2004, any capital contributed which is not genuinely at risk.
  In addition, for films starting principal photography on or after 2 December 2004, the rules for low-budget films (F(No 2)A 1997, s 48) will be aligned more closely with those for larger budget films (F(No 2)A 1992, s 42). This will ensure that relief is always restricted to expenditure that is incurred before the film is completed and is payable no later than four months after completion.

Avoidance through Arbitrage
Tax avoidance measures will be introduced to counter arbitrage schemes that involve hybrid entities or hybrid instruments. Such schemes use the differences between national tax codes to produce tax advantages such as a double deduction for the same expense, or a UK deduction for the payer in circumstances where the recipient is not taxed on the receipt. The legislation will only apply where the Revenue gives a notice to that effect. On receipt of a notice, a company must make or amend its self-assessment taking the legislation into account.

The legislation will have different triggering conditions which will result in a Revenue notice being issued: one set applying to claims for a deduction; another set where an amount is received that is not, apart from this new legislation, taxable. The legislation will apply to deductions and receipts arising or accruing on or after 16 March 2005. However, provided connected persons are not involved, it will not apply to schemes involving deductions that are in place on or before 16 March 2005 if they are terminated by 1 July 2005.

The Revenue indicate that they will give assistance on the application of the new legislation to specific cases under Code of Practice 10 procedures. Draft guidance on the general application of the legislation is available on the Revenue website.

Financial avoidance
Various income tax or corporation tax avoidance schemes involving financial products are to be blocked. Strips of corporate bonds will be brought within the relevant discounted securities regime. Companies’ profits from debt securities acquired by way of stock loans or ‘repo’ agreements will be fully taxable. The company loss-buying rules are to be strengthened for non-trading loan relationship losses.

Generation of artificial capital losses by companies using capital redemption bonds will be prevented by amending the loan relationships rules. Various changes in the loan relationships and derivative contracts rules will prevent companies from converting interest-like income into a capital gain or a ‘tax nothing’ by using shares or derivatives over shares. A de-grouping charge will apply under the loan relationships and derivative contracts rules, and other group provisions are to be amended. The 15-year exception limit for rent factoring schemes is to be abolished. With minor exceptions, companies’ annuities and annual payments will no longer be charges on income, deductibility instead depending on the management expenses regime. Any possibility of a double deduction under the manufactured interest and accrued income scheme rules in respect of an income tax scheme involving a stock loan of gilts is to be eliminated.