PN 03
6 December 2006
Ensuring fairness for all taxpayers
A package of measures aimed at ensuring certainty and equity in the tax system was announced by the Chancellor today. These measures will ensure that all individuals and companies contribute their fair share to the provision of public services, while maintaining the UK's status as a competitive and dynamic economy.
The measures, which will protect revenue for investment in public services, are targeted at tax avoidance. Many of the measures have been informed by the disclosure rules introduced in Finance Act 2004, which allow HM Revenue and Customs (HMRC) to identify and target specific risks to the tax system. The package includes a strengthening of the disclosure regime, and the use of targeted anti-avoidance measures as a proportionate response to those who seek to avoid paying their fair share.
Details
Fairness and certainty for taxpayers
Managed Service Company Schemes
The Government is taking action to tackle Managed Service Company (MSC) schemes which are used to avoid paying employed levels of tax and NICs. Income received by workers in MSCs in relation to services provided through the MSC will be subject to employed levels of tax and NICs, with the MSC obliged to operate Pay As You Earn (PAYE) and deduct tax and Class 1 NICs on that income - and the rules for tax relief for travel expenses will be the same as for other employed workers. The Government will also address the problem of MSCs escaping payment of tax and NICs due by allowing the recovery of these debts from appropriate third parties.
This will protect the Exchequer and ensure a level playing field for compliant businesses and workers. The Intermediaries legislation will remain in place for Personal Service Companies.
The Government is consulting on the draft legislation to implement this measure. The draft legislation and questions for consultation are set out in the consultation document Tackling Managed Service Companies, published alongside the Pre-Budget Report today.
Six-Year Limitation Period for all Direct Tax Claims
The Government today announced that it will legislate to ensure that the limitation period for the recovery of direct tax paid by mistake of law is six years from the date of payment. This is to ensure consistency with the limitation period for making claims in respect of direct taxes paid under assessment as a result of a mistake in a tax return, as specified in section 33 Taxes Management Act 1970 and paragraph 51 schedule 18 Finance Act 1998. This follows a recent House of Lords decision and restores the balance of interests secured by such a limitation.
Taking no action would risk unwarranted transfers from taxpayers in general to the current shareholders of certain claimant companies. The provision will have retrospective effect, but will not disturb the entitlement of those who have secured what amounts to a final judgment in their favour prior to 6 December 2006.
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VAT - Partial Exemption 'Special Method'
Following consultation over the summer, changes will be made to the VAT partial exemption regime with effect from 1 April 2007. Businesses will be required to declare the suitability of their proposed 'special method', for the calculation of VAT liability, before it is approved by HMRC. This will greatly speed up the approvals process benefiting the vast majority of the 20,000 businesses that choose to operate a partial exemption special method.
Details of the measure are set out in PBR note 25.
Protecting Pensions Tax Relief
The Government today announced action to ensure that pensions tax relief continues to be used to produce an income in retirement. The Government will tighten up the rules on Alternatively Secured Pensions (ASP), introducing a minimum income requirement, setting a higher maximum income and imposing an unauthorised payments charge where ASP funds remaining on the death of a member are transferred to pension funds of other members in the scheme.
Details of the measure are set out in PBR note 13.
Life Insurance Companies
A measure will be introduced to ensure that transactions involving the transfer, by life insurers, of assets valued according to regulatory principles do not have inappropriate tax consequences.
Details of the measure are set out in Pre-Budget Report note 11.
Tackling avoidance
Disclosure Regime - tackling non-compliance
Budget 2004 introduced a disclosure regime that has enabled the Government to respond to avoidance more swiftly and in a more targeted fashion. In order to ensure that the regime functions consistently, the Government will consult on a new power to investigate a scheme where there are reasonable grounds to believe that a promoter has failed to comply with its statutory disclosure obligations. HMRC will publish a consultation document later this month.
A Targeted Anti-Avoidance Rule for Capital Losses
The Government today announced that schemes designed to enable individuals, trustees and personal representatives to gain a tax advantage from contrived capital losses will be closed with effect from today. This will be delivered by a targeted anti-avoidance rule ensuring that allowable capital losses are restricted only to those arising from genuine commercial transactions.
Details of the measure are set out in Pre-Budget Report note 18.
Stamp Duty Land Tax - Closure of avoidance schemes
Measures to counter avoidance of stamp duty land tax will come into force from 2pm today. These will make ineffective a number of schemes involving the use of leases, partnerships and sub-sales, that are currently being exploited in an attempt to avoid paying stamp duty land tax.
Details of the measure are set out in Pre-Budget Report note 17.
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Taxation of Companies - Closure of avoidance schemes
The Government announced measures, effective from today, to tackle artificial schemes, brought to light under the disclosure rules. These schemes are used by companies to avoid tax by exploiting certain aspects of legislation, including the rules on manufactured payments, exchange gains and losses, annual payments, double taxation relief, lease and leaseback and controlled foreign companies (the public quotation exemption) . 1
Details of these measures are set out in Pre-Budget Report notes 1 and 6.
Fraud
Missing Trader Intra-Community Fraud
The Government has strengthened its strategy for tackling Missing Trader Intra-Community (MITC) VAT fraud in response to a rapid increase in attempted fraud in the latter part of 2005-06 and the first quarter of 2006-07. The number of staff deployed has been increased to over 1400 and focusing on:
- identifying and prosecuting the criminals behind the fraud;
- working internationally to combat cross-border fraud
- identifying and tracking those goods most susceptible to MTIC fraud; and
- more in-depth checking of suspect repayment claims
A significant proportion of these attempted frauds are stopped so the estimated potential impact on VAT receipts is much smaller. New estimates, which take account of mutations in the fraud are published today. These show that attempted MTIC fraud grew to between £3.5billion and £4.75billion in 2005-06 whilst the negative impact on VAT receipts is estimated to be between £2 billion and £3 billion. As part of the wider international strategy, negotiations are continuing with European partners to secure a derogation necessary to introduce reverse charge accounting for goods most commonly used in the fraud.
1.See PN1 for changes to the controlled foreign companies rules following the European Court of Justice ruling in Cadbury Schweppes.
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