Anti-avoidance measures

Issues

Disclosure of Tax Avoidance Schemes: Stamp Duty Land Tax

SDLT schemes have been included in the disclosure regime since 2005 but limited to certain commercial property schemes with an aggregate property value of at least £5m.

New legislation will extend the Disclosure of Tax Avoidance Schemes (DOTAS) regulations to require the disclosure of certain SDLT avoidance schemes that involve residential property with an aggregate value of at least £1m. 

The new rules will also apply to schemes that involve mixed non-residential and residential property where either:

• the value of the residential property is at least £1m; or
• the value of all the property is at least £5m.

In addition, users of all SDLT schemes who expect to obtain a tax advantage as a result of entering into the arrangements, for both commercial and residential property, will be required to report the use of the scheme back to HMRC. Currently there is no requirement for a scheme reference number to be included on the SDLT return. A new form will be published before the operative date, which will be used to report the scheme reference number when disclosed avoidance schemes are undertaken and therefore identify the users.

The regulations will come into effect no later than 1 April 2010. To restrict disclosures to only new and innovative schemes, the regulations will contain a ‘grandfathering’ rule that will exempt from disclosure any scheme of the same, or substantially the same, description as a scheme first made available for implementation before the changes come into force.

Capital allowances

Anti-avoidance measures to prevent tax avoidance through the transfer of an entitlement to benefit from capital allowances on plant and machinery used for the purpose of a trade have been further tightened.

Earlier in the year, HMRC became aware of a number of groups acquiring companies solely to make use of their large unclaimed capital allowances. In response, on 21 July the Government published draft legislation to prevent, with immediate effect, the use of losses which have crystallised as a result of arrangements with a third party to acquire an interest in an excess of capital allowances.

With effect from 9 December 2009 the following amendments have been introduced:

• The legislation will equally apply where an unincorporated shareholder sells a company with an excess of allowances to a group if it is a tax motivated transaction
• The legislation will contain a rule to prevent manipulation of the tax written down value.
• Capital allowances on ships will also be brought into the anti-avoidance legislation.

Plant and machinery leasing

In response to disclosed avoidance schemes involving the leasing of plant or machinery legislation will be introduced in Finance Bill 2010 to counter the tax advantages.

One type of scheme involved the sale by an offshore company of the right to lease rental income. The receipt is tax-free. The company subsequently migrated to the UK and bought the asset, claiming capital allowances on the full cost or claiming a deduction in respect of rental rebates paid to the lessee when the lease terminates. These arrangements generated a tax loss where there is no economic loss.

The other type of scheme involved a UK lessor that has claimed capital allowances in the early years of a lease, thereby generating losses, who subsequently sells the right to income so that it is not immediately taxed. The lessor then ceases to be UK resident before being taxed on the entirety of the profits it received.

The new legislation will have effect from 9 December 2009 and will restrict capital allowances or similar deductions, such as rental rebates, where the related income from the sale of the asset is not taxed.

Sale of lessor companies – changes to anti-avoidance rules

A restriction has been removed which should ease commercial negotiations to buy lessor companies.

Anti-avoidance rules introduced in 2006 brought in a charge on the vendor of a leasing company calculated to recover any tax timing benefit enjoyed by their group at the time of sale. The buyer receives a matching relief which can be set against other group profits. However, in the current economic climate where a purchaser group is loss-making, the benefit is not fully utilised and this can cause difficulties in reaching an agreement over the price of the leasing company.

However, from 9 December 2009, it is possible to elect for the charge and the relief to be removed and instead the profits of the leasing company are ring-fenced in the purchaser’s group.

In addition, in a tightening of the anti-avoidance rules, a loophole is removed from 9 December 2009 under which it was possible to avoid the charge by taking advantage rules for consortia.

Comments

These measures further support the Government’s focus on preventing tax avoidance schemes and demonstrates the use of the disclosure regulations to identify and block tax avoidance schemes.

Arguably, some of the measures introduced by the Government appear a little heavy handed.