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The Government is to tackle a financial loophole that could allow businesses to state their taxable profits at a significantly lower level than their actual profits.
The Treasury plans to introduce legislation to clarify the corporation tax (CT) treatment of manufactured payments received by companies in the course of certain sale and repurchase (repo) transactions.
The amendment will be backdated to October 2007 – the date repo legislation was introduced – in a move that suggests the tax authorities are ramping up their aggression towards tax avoidance.
The new rules will aim to ensure that manufactured payments are taken into account in calculating profits chargeable to CT if they are taken into account in computing accounting profits.
The clarification follows a recent challenge by a single, unnamed firm to the repo legislation in chapter 10 of part 6 of the Corporation Tax Act 2009 that manufactured payments received by companies may not have to be taken into account for tax purposes if the securities to which they relate are not recognised on the companies’ balance sheets.
Treasury minister Stephen Timms warned that the challenge, if successful, could result in businesses seeking to deduct for tax purposes manufactured payments that have contributed to their accounting profits. By excluding the payments, the companies’ taxable profits could be much lower than their actual profits.
The proposed legislation will aim to ensure that existing practice is followed and the previous general understanding of the tax position is maintained.
The updated rules will not result in any company being charged to tax on more than its actual profits, but they will prevent the possibility of relief for artificial losses, said Mr Timms.
In response to the announcment of the new legislation, the Chartered Institute of Taxation (CIOT) raised concerns about the apparent increasing use of retrospective action in the tax system.
The professional body's tax policy director, John Whiting, said, 'The use of retrospective legislation always concerns us greatly. We think it damages the key principle of certainty in the tax system that is so important to its reputation and is inherently unfair.
'We can understand that at times the Government wants to take action to "confirm the general understanding of the tax system"... However, this needs to be used with great caution: it must not dislodge the principle that the taxpayer is taxed on the wording of the legislation in place at the time of their actions,' said Mr Whiting.
