ANTI-AVOIDANCE

Disguised Remuneration

There is to be anti-avoidance legislation included in Finance Act 2011 aimed at those who use third party arrangements, commonly involving trusts and other vehicles, to avoid, reduce or defer liabilities to income tax (and National Insurance contributions) on rewards of an employment. It will have effect for 2011/12 onwards but see also the anti-forestalling provisions below.

A new income tax (and National Insurance) charge will apply where a third party provides an employee with reward, recognition or a loan in connection with the employee’s employment. Third party arrangements that are not tax avoidance will as far as possible be excluded; examples include genuine deferred remuneration arrangements which last less than five years and genuine commercial arrangements for the provision of designated employee car ownership schemes.

The legislation applies equally to third party arrangements that are used in addition to, or instead of, registered pension schemes to remunerate individuals above the annual and lifetime allowances for registered schemes.

The new income tax charge will apply to:

sums or assets that are earmarked for employees by trusts or other intermediaries;
loans provided to employees by trusts and other intermediaries;
assets provided to employees by trusts and other intermediaries; and
sums or assets that are earmarked by the employer with a view to a trust or other intermediary providing retirement benefits to the employee.

The charge will be based on:

the full amount of any sum of money made available, including the value of any loan; and
the higher of cost and market value of any asset used to deliver the reward or recognition, for example where the asset in question is transferred or otherwise made available for an employee’s use and benefit as if the employee owned the asset.

The amount chargeable will be employment income and will also be PAYE income, which means that PAYE must be accounted for by the employer at the time the income is treated as arising to the employee, i.e. when the money, asset or loan is earmarked or provided.

Anti-forestalling provisions apply to the payment of sums and the provision of readily convertible assets (i.e. assets easily convertible into money) for the purposes of securing the payment of sums (including loans) where:

the sum is paid, or the asset is provided, on or after 9 December 2010 and before 6 April 2011; and
if it had been paid or provided on or after 6 April 2011, it would have been caught by the new legislation above.

Chargeable income will be deemed to arise on 6 April 2012 if the sum paid has not been repaid, or the readily convertible asset has not been returned, before that date and has not otherwise been charged to tax as earnings. It will be PAYE income.

Derecognition of Loan Relationships

Revised anti-avoidance rules are to be introduced to counter arrangements under which corporation tax profits fall out of account, or losses are claimed, as a result of the derecognition of a financial asset that is a loan relationship or a derivative contract. The provisions will apply where amounts in respect of such assets are not fully recognised in a company’s accounts as a result of tax avoidance arrangements to which the company is a party, provided that the company continues to be party to the relationship or contract. Credits and debits will have to be brought into account as if the amounts concerned had been fully recognised. Furthermore, any losses arising from the derecognition of the asset will not be allowable. These rules will apply to debits and credits arising on or after 6 December 2010.

Additionally, with effect from 23 March 2011, a company will be required to bring into account any difference between the accounts carrying value and the fair value of a derivative contract as a credit for the period in which tax avoidance arrangements are entered into.

Loan Relationships, Derivative Contracts and Group Mismatches

New anti-avoidance provisions are to be introduced to prevent groups of companies using loan relationships or derivative contracts to gain a tax advantage as a result of asymmetries in the way the group members bring amounts into account for corporation tax purposes.

An interim measure will apply to debits and credits arising on or after 6 December 2010 and will deal with specific disclosed schemes. This will be replaced by a generic measure which will apply to arrangements to which a company is party on or after the date of Royal Assent to Finance Act 2011. This measure will impose symmetrical tax treatment where either:

obtaining a tax advantage from asymmetrical treatment was certain from the start and the expected tax advantage is at least £2m; or
one of the main purposes of any group company was to obtain the chance of a tax advantage and such an advantage is more likely to result from the scheme than a disadvantage.

Functional Currency of Investment Companies

An anti-avoidance provision is to be introduced to prevent companies retrospectively choosing a functional currency (the currency in which their profits are computed before conversion into sterling) in order to gain a tax advantage. The provision will apply for periods of account beginning on or after 1 April 2011 so that, where a company changes the currency in which accounts are drawn up, no foreign exchange gains or losses from loan relationships or derivative contracts will be brought into account for tax purposes in the first period of account under the new currency.

With effect from the same date a company whose main purpose is to make investments will also be able to make a prospective election for a functional currency for tax purposes, other than the currency of the accounts, where this reduces its compliance burden. An elected currency will only be acceptable if there is a reasonable basis for its use.

Plant and Machinery Leasing

HMRC have identified an avoidance scheme involving the sale, leaseback, and reacquisition of plant and machinery over a short period with the aim of claiming tax relief twice on a single amount of expenditure. The scheme is dependent on the lessee paying an amount under a guarantee of the value of the plant or machinery at the end of a long funding finance lease (the ‘residual amount’). Legislation will be introduced to counter the scheme and to ensure that tax relief available to a lessee under such a lease, whether through capital allowances or otherwise, does not exceed his actual expenditure.

The legislation will have effect in relation to new arrangements guaranteeing a residual amount under a long funding finance lease entered into on or after 9 March 2011 and to pre-existing arrangements where payment under a guarantee has not been made prior to that date.

Sale of Lessor Companies

Changes are to be made to the sale of lessor company charge, and the option to elect out of the charge is to be removed. The changes are intended to ensure that the full amount of profits from a business of leasing plant or machinery that are deferred for tax purposes are brought into charge at the time of the sale. Broadly, the changes will apply where the sale or transfer triggering the charge takes place on or after 23 March 2011. Where an opt-out election is made in respect of the sale of a company before that date and there is a disposal event involving plant or machinery on or after that date, the full value of the plant or machinery will have to be taken into account in calculating the disposal value.

Tax Treaties

Finance Act 2012 will include anti-avoidance legislation with the aim of ensuring that relief or exemption from UK tax will not be given where a claim is made under the UK’s double taxation treaties and where arrangements have been made in relation to the claim to avoid tax. This is aimed at:
l UK residents (individuals, trustees and companies) who use tax avoidance schemes; and
l overseas residents who enter into arrangements to obtain benefits under the UK’s double taxation treaties where they are not properly due.

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