Chancellor cracks down on tax avoidance but BDO says flatter tax system is the answer

- UK tax legislation now exceeds 10,000 pages -

Chancellor cracks down on tax avoidance but BDO says flatter tax system is the answer

The Chancellor signalled a package of measures to crack down on perceived tax avoidance and predictably, projected that this will recoup extra tax of £1 billion annually.  These represent a sequence of targeted measures against tax planning deemed to be inappropriate which will, in many cases, have been disclosed to HMRC under the reporting obligations for promoters of so-called "tax schemes".

One example, primarily targeting individuals, is a measure to prevent "Transfers of Income Streams" where the underlying asset has been retained.  This seeks to stop taxpayers converting income to a gain subject to capital gains tax rather than income tax in a contrived manner.

Stephen Herring, Senior Tax Partner, at BDO LLP comments: "This form of tax planning is an inevitable consequence of the widening gulf between the 18 per cent flat capital gains tax rate and top rate of income tax, now set to rise from 40 per cent to 50 per cent. We are bound to see more tax planning and counter measures to prevent it over the next few years.”

Another measure, focused on individuals, tightens the restrictions on interest deductions on loans to partnerships or "close" (ie narrowly owned) companies.  This supplements a raft of recent measures targeting the perceived abuse of, for example, "film scheme" partnerships.  In this case, any arrangements guaranteeing virtually risk free rewards are targeted by the measure.

A number of anti-avoidance provisions target financing arrangements in the corporate sector including rules on so-called "Disguised Interest” in an attempt to ensure that companies are taxed on receipts that are commercially equivalent to interest income.  Another case is revisions to the "Manufactured Interest" rules which reverses a tax case decision in a case lost by HMRC where the Court found that a company was able to claim tax deductions for interest costs which HMRC considered to bear no relation to their actual income.

Further crack downs on financial arrangements by companies target two specific schemes that have been notified to HMRC, which sought to exploit the unintended interactions of the complex corporate debt tax regime with accounting standards applying to derivatives.  Further measures are designed to block certain schemes that HMRC considers seek to manipulate the foreign exchange matching rules.

A final example of existing rules being tightened yet again, is changes to the legislation already announced in 2008 to counter sale and leaseback arrangements to restrict capital allowances claims so that, broadly, businesses cannot claim more relief than would have been available on a straight forward finance lease.

Stephen Herring continued: “It is inevitable that the Treasury will seek to clamp down on complex, and arguably artificial, tax planning arrangements where the tax result is out of line with the underlying economic situation.  However, this approach contrasts with the often hardline approach of HMRC in cases where they seek to apply an excessively narrow interpretation of tax legislation to impose an additional burden on taxpayers carrying out purely commercial transactions.  We would welcome a fairer and more balanced approach seeking to bring tax in line with economic substance and to reduce the distortions within the current tax system that drive perceived anti-avoidance.  A broader, flatter tax system would reduce the need for this type of intricate anti-avoidance measures which means that the UK's tax legislation now exceeds 10,000 pages.”

-Ends-

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