Protecting Tax Revenues

Measures aimed at tackling tax fraud and avoidance were announced by the Chancellor today. By protecting the tax system from abuse, these measures will ensure that everybody pays their fair share of tax.

The Government will continue to tackle avoidance using legislation and litigation, while ensuring that the competitiveness of the UK is maintained. In recent Budgets, the Government has built on this approach by introducing: disclosure rules to allow HM Revenue and Customs (HMRC) to take rapid, focused action; targeted anti-avoidance measures based on purposive tests; and legislation effective from the date of announcement, as a proportionate response to those who seek to avoid paying their fair share.

Details

Modification and Extension of the Disclosure Regime

In addition to the announcements on the disclosure regime in the 2005 Pre-Budget Report, the following changes to the regime will be made:

the direct tax filters will be replaced by hallmarks in line with the system for Value Added Tax (VAT); and
a de minimis provision for schemes designed in-house is to be introduced which will ensure that individuals and small and medium enterprises (SMEs) will not have to disclose.

The changes will apply to schemes that are made available or implemented on or after 1 July 2006 and will allow HMRC to continue to respond swiftly and proportionately to tax avoidance. Draft regulations and a partial Regulatory Impact Assessment (RIA) will be published by HMRC alongside the Finance Bill.

Remuneration tax avoidance involving options

Schemes designed to avoid the payment of income tax and national insurance through the use of options over shares and securities will be closed, with effect from 2 December 2004.

This is in accordance with the Paymaster General’s announcement in the 2004 Pre-Budget Report that, if further contrived arrangements involving the avoidance of tax and NICs on employment remuneration emerged, the Government would legislate to close them down, where necessary from that date.

Missing Trader Intra-Community (MTIC) VAT fraud

The Government remains determined to tackle MTIC fraud, and the criminals perpetrating it. Legislation will make explicit HMRC’s powers to evidence the inspection of goods and will create the power to direct individual businesses to maintain relevant records will be introduced. These changes will improve HMRC’s ability to identify and track those goods most susceptible to MTIC ‘carousel’ fraud, such as mobile phones and computer chips. Carousel fraud involves the repeated circulation of goods between the UK and other EU Member States, often via third countries outside the EU, with VAT being stolen on each circuit.

In addition, legislation is to be introduced to enable a further anti-fraud measure to be implemented once the European Commission agrees the derogation request announced in January.

VAT – Partial exemption ‘special method’

In the coming months, HMRC will consult informally on a proposed change to the VAT partial exemption regime. Views will be sought on a new requirement for businesses to declare the suitability of proposed partial exemption ‘special methods’ before HMRC gives approval for their use. This change will strengthen the partial exemption regime and speed up the approval process.

VAT – Face - value vouchers

Measures to strengthen current legislation governing the VAT treatment of face-value vouchers, such as phonecards, will be introduced, with effect from Royal Assent of Finance Bill 2006. These changes will also ensure that Government is able to act quickly to tackle any future tax avoidance in this area.

Tax avoidance involving financial products

Measures targeting avoidance using financial products will be introduced, with effect from today. The measures, which were informed by disclosures, block avoidance involving:

the exploitation of the group continuity rules for loan relationships and derivative contracts;
contrived arrangements which cause profits on loan relationships to be de-recognised for accounting and hence tax purposes;
contrived arrangements within groups of companies to avoid tax on interest; and
attempts by companies to get around the ‘shares as debt’ rules.

In addition, the rules announced on 5 December 2005 which prevent avoidance of tax on interest on cash using stock lending arrangements will be extended to contrived arrangements which are similar to stock lending arrangements.

Preserving the integrity of charitable tax reliefs

Measures to protect charitable reliefs from misuse and protect the reputation of charities will be introduced that will:

from today, restrict the scope for donors to place large sums of money into a charity and get the money out again after tax relief has been granted;
from today, restrict tax relief where charitable funds are used for non-charitable purposes; and
from 1 April, extend to all companies rules that restrict the benefits a company can receive in return for a donation to a charity.

These measures are in response to the increasing exploitation of these reliefs.

Capital gains tax avoidance

A measure to counter avoidance of capital gains tax will be introduced with effect from today. This measure ensures that individuals and trustees cannot exploit the 'bed and breakfasting rules' to avoid tax on disposals of shares and other securities.

Reinforcing the Tackling Tobacco Smuggling Strategy

Further details of how the Government is reinforcing its strategy to tackle tobacco smuggling are set out in a document New Responses to new Challenges – Re-enforcing the Tackling Tobacco Smuggling Strategy, published today. Since the launch of the Tackling Tobacco Smuggling Strategy in 2000, the illicit market share has been reduced to 16 per cent, protecting around £6 billion in revenue. The strategy is being reinforced to clamp down further on smuggling, and to tackle the persistent smuggling of hand-rolling tobacco and the growing threat from counterfeit products. A new communications strategy aims to raise awareness among smokers of the risks of smuggled products, especially counterfeit.

Further information will be published today on the HMRC website: www.hmrc.gov.uk

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