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ANTI-AVOIDANCE

Corporate Transparency: Personal Tax Accountability of Senior Accounting Officers of Large Companies

New obligations on the senior accounting officers of large companies (i.e. companies other than those defined as small or medium-sized in the Companies Act 2006) will be introduced with effect for accounting reference periods beginning on or after the date of Royal Assent to Finance Act 2009. Senior accounting officers must:

Large companies will have to notify HMRC of the identity of the senior accounting officer.

The new obligations will be supported by penalties for careless or deliberate failures or inaccuracies: such penalties will be applicable to the senior accounting officer personally and to the company.

Publishing the Names of Deliberate Tax Defaulters

HMRC will be able to publish the names and details of all those who are penalised for serious defaults leading to a loss of tax of more than £25,000.

The measure will apply to individuals, businesses and companies who are penalised for deliberate or deliberate and concealed defaults, but will not affect those who make an unprompted disclosure, or full prompted disclosure.

In addition to the normal right of appeal against all aspects of a penalty, taxpayers will be informed prior to publication and will be able to make representations to HMRC. Details will be published quarterly within 1 year of the penalty becoming final and will be removed from publication 1 year later.

The measure will be brought into effect from a date to be announced by Treasury Order.

Foreign Exchange Losses: Targeted Anti-avoidance Rule

In relation to companies that hold investments in ‘foreign operations’ – subsidiaries or other business enterprises that operate in a different currency to the company – a number of tax avoidance schemes have been disclosed to HMRC that abuse the provisions for ‘foreign exchange (forex) matching’. Finance Bill 2009 will aim to stop such schemes by providing that exchange gains or losses on borrowings or currency derivatives can only be ‘matched’ if they do not arise from tax avoidance arrangements. The measures will apply to company accounting periods beginning on or after 22 April 2009. Where an accounting period straddles 22 April 2009, it will apply only to exchange gains or losses arising between 22 April 2009 and the end of the period.

Transfers of Income Streams

The Finance Bill will include legislation intended to ensure that receipts which are derived from a right to receive income, and which are an economic substitute for income, will be taxed as income for the purposes of corporation tax and income tax. The legislation will apply to transfers of income taking place on or after 22 April 2009. It will not apply in relation to sales of income that arise from loan relationships or derivative contracts, where that income would have been subject to any exclusions under those rules. There will be provisions to exclude amounts which are already taxed as income, or where the transfer of the income is by way of security. Where the transferee is a company, it will be taxable only on its accounting profit from acquiring the income stream.

Disguised Interest

The Finance Bill will include legislation to provide that returns from arrangements which produce amounts which are economically equivalent to interest will be treated in the same way as interest for the purposes of corporation tax. The legislation will generally apply to arrangements to which a company becomes party on or after 22 April 2009, but will also apply to certain arrangements in place before that date that are within the scope of existing ‘disguised interest’ legislation which is to be repealed. There will be exclusions from the legislation where the return arises to a company purely from an increase in the value of shares that it holds in a connected company, and it is reasonable to assume that it is not a ‘main purpose’ of the arrangements to secure that the return is not charged to tax as income.

Financial Arrangements

Two schemes that have been notified to HMRC under the avoidance disclosure rules will be tackled by legislation introduced by Finance Bill 2009. In the first, intra-group finance is arranged under the terms of a bond that is highly likely to convert into shares of the issuing company. The debtor company accrues a deduction for a finance cost that is greater than the finance return that the creditor company brings into account. In the second, a company ‘derecognises’ in its accounts a derivative contract that is carried at fair value with the result that profits arising to the company on the contract fall out of account for tax purposes. The legislation has effect for debits and credits arising on or after 22 April 2009.

Interest Relief

The Finance Bill will include legislation intended to block schemes whereby the provisions which allow individuals to claim relief for interest payments on loans used to invest in partnerships or close companies are used in avoidance arrangements which purport to guarantee that the borrower will be able to make a profit as a result of the availability of the relief. The legislation will deny relief for interest which is paid as part of an arrangement that seems almost certain to allow the investor to exit the arrangement with more money than was originally invested, where the investor’s main purpose in being party to the arrangements is to secure that result. The legislation will apply to interest payments made on or after 19 March 2009.

Employment Income Legislation

Employees and former employees are entitled to tax deductions for:

In response to a known avoidance scheme, legislation is to be introduced that will deny such a deduction where the liability in respect of which the deduction would otherwise be due has been paid in connection with arrangements a main purpose of which is the avoidance of tax. The legislation will apply to payments made on or after 12 January 2009, regardless of when the arrangements that resulted in the payments were entered into.

An individual sustaining a loss in an employment or office (an ‘employment loss’) may make a claim for it to be set against general income. In response to known avoidance schemes the legislation is to be amended to deny relief for a loss if, and to the extent that, it is sustained as a result of anything done in pursuance of arrangements a main purpose of which is the avoidance of tax. This will have effect in relation to losses incurred in 2009/10 and subsequent tax years, and also in relation to a loss incurred in 2008/09 if, or to the extent that, it is occasioned by an act or omission occurring on or after 12 January 2009. Where the taxpayer has paid less tax on 31 January 2009 than he should have done, due to an employment loss that now falls to be disallowed, the due date for surcharge purposes is deferred until 1 April 2009, so that no surcharge will be due if the extra tax is paid before 29 April 2009. The legislation will also include protection from penalties where a person has made an employment loss relief claim at any time between 12 January 2009 and 1 April 2009 inclusive and the claim is affected by the new anti-avoidance rule.

Life Insurance Policies

In order to counter schemes that exploit the income tax loss relief rules by using offshore life insurance policies, legislation will be introduced to ensure that income tax losses arising on a chargeable event in connection with such policies do not attract loss relief from 6 April 2009. ITA 2007 will be amended accordingly.

ITA 2007 will also be amended so that transitional provisions will apply to 2008/09 to restrict such claims where on or after 1 April 2009:

Manufactured Interest

The Finance Bill will include legislation intended to prevent a High Court decision from affecting the tax treatment of payments of manufactured interest. The legislation is intended to ensure that the tax treatment of such payments will follow the treatment of the payments in company accounts prepared in accordance with generally accepted accounting practice. It will apply to deemed payments of manufactured interest made on or after 27 January 2009, but will apply to actual payments of manufactured interest made before as well as on or after that date, in order to ensure that existing practice is followed.

Plant and Machinery Leasing

Legislation, which was announced and published in draft on 13 November 2008, will be introduced in Finance Bill 2009 to counter avoidance involving the leasing of plant or machinery. It will ensure that:

The measure will generally have effect for transactions entered into on or after 13 November 2008; but some aspects of the measure will have effect on or after 22 April 2009.

Real Estate Investment Trusts

The Finance Bill will introduce a power to make regulations that will prevent restructuring within groups of companies from enabling companies to meet the real estate investment trust (REIT) conditions and tests when they would not have done so without that restructuring. The measure will also exclude owner-occupied properties from the regime, and will enable potential REITs with tied premises to enter the regime. The changes will take effect from 22 April 2009.

Double Tax Relief Avoidance

Anti-avoidance provisions will be introduced in relation to: