.png)
.png)
Artificial losses
A targeted anti-avoidance rule is to be introduced to counter schemes to create and use artificial capital losses to avoid tax. The measure will ensure that allowable capital losses are restricted to those arising from genuine commercial transactions. Where a person has made arrangements, and a main purpose of those arrangements is to gain a tax advantage by creating an artificial capital loss, any resulting loss will not be an allowable loss for the purposes of capital gains tax, income tax or corporation tax.
The measure will introduce, in a new section 16A into TCGA 1992, a general rule covering capital gains tax, income tax and corporation tax, replacing the corporation tax provisions introduced into TCGA 1992, s 8 by FA 2006, without changing their effect. The changes will take effect in relation to capital losses arising on disposals on or after 6 December 2006.
These new rules are intended to prevent an individual, trust or other non-corporate entity obtaining any tax relief for losses which derive from arrangements which have tax avoidance as 'one of their main purposes', explains BDO Stoy Hayward's Stephen Herring. It extends the scope of the rules introduced in the 2006 Budget in order to prevent companies creating artificial capital losses in order to reduce their tax liabilities. Overall, he says it is 'another step in the Treasury's clampdown on what it perceives to be the "tax avoidance industry". However, the fact that it is revisiting legislation only enacted a few months ago demonstrates that it may still have some way to go in winning this campaign'.
STEP's John Riches supports the decision to 'tie up artificial capital gains tax losses' but says that further 'clarification of how the rules will be applied in practice' is needed.
CT avoidance
Legislation will be introduced to block six avoidance schemes that have been notified to HMRC under the disclosure rules introduced in Finance Act 2004:
- Arrangements whereby certain companies create artificial tax losses by claiming exemption from tax on annual payments paid by individuals, but seek a deduction in computing their profits for the cost of acquiring the rights to the payments.
- The use by banks and other financial traders of authorised investment funds (AIFs) to avoid restrictions on claiming double taxation relief.
- Arrangements to avoid the manufactured payment unallowable purpose rule by characterising such a payment as a fee.
- Arrangements involving guarantees and thinly capitalised companies to hedge currency exposure that result in tax relief where there is a loss on a loan relationship but no tax charge when there is a gain.
- Arrangements involving lease and leaseback of plant and machinery whereby the company claims tax relief for paying rents that are in substance a loan but is not taxable on what is, in substance, the repayment.
- Arrangements whereby companies seek to shift profits offshore and return them to the UK without incurring a tax charge.
The changes are effective on or after 6 December 2006 and are in response to disclosures made during the year.
CFCs
Draft legislation for inclusion in the next Finance Bill will amend the controlled foreign companies rules following the recent European Court of Justice judgment in Cadbury Schweppes.
The changes will relax UK CFC rules by enabling UK companies to apply to HMRC to disregard those profits of their CFCs that arise from genuine economic activity in business establishments in other European Union Member States or certain other states in the European Economic Area.
The public quotation exemption provided for in TA 1988, s 748(1)(c) will be repealed. CFCs currently claiming the public quotation exemption that are not involved in avoidance will be able to claim other exemptions in the current rules.
The new rules will have effect on and after 6 December 2006. Where a company's accounting period straddles this date, for the purposes of applying the changes it will be treated as two separate periods, one covering the period before 6 December 2006, and one starting on that date. The repeal of the public quotation test will also have effect on and after 6 December 2006.
Stephen Herring of BDO Stoy Hayward, says that the Chancellor has introduced measures 'to counter the perceived increased scope for corporate groups to accumulate profits in companies in low tax jurisdictions within EU countries', following the recent European Court decision in favour of the taxpayer in Cadbury Schweppes. 'The main thrust of the changes is aimed at ensuring that only profits earned in "genuine economic activities" taking place within the EU (and Iceland and Norway) fall outside the scope of the controlled foreign companies legislation.'
While 'the changes were anticipated', Mr Herring says that he is disappointed that 'the Chancellor did not take the opportunity to reduce the headline corporation tax rate, perhaps to 25%, which would itself reduce the incentive for cross-border investors to set up operations in lower tax jurisdictions outside the UK'.
KMPG's Chris Morgan says that the announcement is 'clearly contrary' to ECJ ruling as it aims to limit the circumstances in which it will apply. 'It suggests that the new relief will only protect the profits arising from “labour” activities, i.e. directly from workers' actions, and not from profits arising from the investment of capital.' This distinction is important, says Mr Morgan, as it 'means for example, a shared services centre should fall outside the CFC rules. However, a finance company or an intellectual property management company would not be protected'.
