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PN 3

21 March 2007

Ensuring fairness for all taxpayers

The Chancellor today announced a series of measures to ensure that all individuals and companies pay their fair share of tax. 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. These measures support the provision of public services whilst protecting the UK's competitive business environment.

Many of these 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. Measures to respond to the threat posed to the public finances by fraud are also announced today.

Details

Tackling managed service companies

The Government announced at Pre-Budget Report 2006 action to tackle Managed Service Company (MSC) schemes that are used to avoid paying employed levels of tax and NICs. From 6th April 2007 for income tax, and - subject to Finance Bill Royal Assent - from 6th August 2007 for National Insurance, income received by workers in MSCs in relation to services provided through the MSC will be subject to employed levels of tax and NICs. 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.

The consultation on the draft legislation showed widespread support for action to tackle MSCs. The Government is responding to key concerns raised, as described in the summary of consultation responses published today (Tackling Managed Service Companies: summary of consultation responses) by amending the definition of an MSC to give greater certainty; narrowing the scope of the debt transfer provision; and delaying its application to certain third parties.

Details of the measure are set out in Budget note 46.

Tackling avoidance and protecting tax revenues

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 way. In order to ensure that the regime functions consistently, the Government is introducing new powers for HMRC to investigate a scheme where there are reasonable grounds to believe that a promoter has failed to comply with its statutory disclosure obligations.

The Government has consulted on the draft legislation and will publish the final legislation in this year's Finance Bill.

Insurance Premium Tax - amending the definition of "premium"

The Government today announced a measure to prevent avoidance of Insurance Premium Tax (IPT). With effect from 22 March, the IPT definition of "premium" is amended in order to clarify that it includes payments for a right to require an insurer to provide insurance cover.

Details of the measure are set out in Budget note 31

Loss-Buying

Legislation will be introduced in Finance Bill 2007 to prevent companies buying the trading losses of corporate members of Lloyd's who are leaving the market and with which they have no previous economic connection.

This measure will have effect for changes in the ownership of the loss-making company taking place on or after Budget Day.

Details of the measure are set out in Budget note 9.

Employee benefit trusts (EBTs) - closure of an avoidance scheme

The Government announced a measure, effective from today, to confirm that employers cannot sidestep the existing EBT anti-avoidance provisions by declaring a trust over assets that they already control. It also confirms that any other action which has the effect of creating or enhancing the value of employee benefit contributions are subject to the same anti-avoidance provisions.

The effect of the measure will be to prevent an employer from obtaining a deduction for tax purposes in respect of any such contributions until they are paid to employees in a form on which income tax and NIC are due.

Details of the measure are set out in Budget note 38.

Life Assurance Companies

Legislation will be introduced in Finance Bill 2007 to impose a tax charge where financing arrangements are used by life insurance companies to generate untaxed profits. This measure will be effective for periods of account beginning on or after 1 January 2007

Details of the measure are set out in Budget note 33.

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Sale and repurchase agreements (repos)

A new accounts based regime for taxing repo agreements for companies will be introduced to replace the current mechanical rules. The new regime will take effect from a date to be determined by Treasury Order, following further consultation with business and representative bodies on the detail.

Details of the measure are set out in Budget note 14.

Life insurances policies and commission arrangements - closure of avoidance schemes

The Government today announced a measure, effective from today, that tackles schemes that use life insurance policies and commission arrangements to avoid tax on investment income. The schemes are typically marketed by advisers to individuals with significant sums to invest; this measure targets the larger premium, relatively short-term policies used in such schemes.

Details of the measure are set out in Budget Note 35.

Corporate Capital Gains and Losses

Measures to counter avoidance of corporation tax on capital gains were announced today. These include:

  • amendments to a targeted anti-avoidance rule announced at PBR 2005. This measure follows a further disclosure and is effective from today. Further details of this can be found in Budget Note 8; and


  • a measure that will stop an avoidance scheme that exploits the interaction between the rules for transfer of assets within groups of companies and that for options. This change was announced on, and is effective from, 6 March 2007.

Tax Avoidance Involving Financial Products - closure of avoidance schemes

Measures to counter schemes that use financial products to avoid corporation tax were announced by the Government, and with one exception became effective, on 6 March 2007. Schemes included:

  • artificially obtaining a tax-free income stream through the manipulation of the settlements legislation;


  • circumventing tax being charged under the loan relationship rules as they apply to shares;


  • creating artificial losses as a result of arrangements being put in place guaranteed from the outset to cause the value of a Collective Investment Scheme to depreciate;


  • deferring or restricting the tax charge involving derivative contracts; and


  • banks/financial traders circumventing limits on offsetting foreign tax against UK corporation tax through 'Authorised Investment Funds' (effective from 7 March 2007, amending regulations effective from 6 December 2006).

The Government also introduced various measures (effective from 6 March 2007) to clarify the scope of the rules on structured financing arrangements.

Partnerships and Sideways Loss Relief - closure of avoidance schemes

A measure to counter the avoidance of tax through the use of sideways loss relief was announced on 2 March 2007, with effect from that date.

Combating fraud

Missing Trader Intra-Community Fraud - joint and several liability

The Government today announced steps to modernise the Joint & Several Liability measure introduced in 2003, to counter potential mutations in Missing Trader Intra Community VAT Fraud:

  • from 1st May 2007, the goods covered by Joint & Several Liability, will be extended to include electronic goods and their related parts and accessories;


  • following Royal Assent to the Finance Bill, HMRC will have greater flexibility to make future changes to these provisions as the fraud mutates; and


  • HMRC will be updating guidance to businesses.

These are proportionate steps, which compliment the introduction of the reverse charge accounting procedure announced on Monday 19 March 2007 and aimed solely at those who choose to profit from fraud. This demonstrates that the Government is committed to tackling this organised criminal attack on the VAT system.

Details of the measure are set out in Budget note 60.

Excise strategies

Repeal of excise duty relief for small non-commercial consignments

The Government today announced that excise duty relief for small non-commercial consignments will be repealed. This follows a recent judgement by the European Court of Justice that makes it clear that current reliefs are unlawful. This will mean that all alcohol and tobacco sent by post from abroad will be liable to UK excise duty.

Details of the measure are set out in Budget note 77.

Tackling alcohol fraud

The Government today announced that it will clarify guidance on the information businesses need to provide to support claims for drawback of excise duty, with effect from 1 April 2007. This will ensure that HMRC can verify that goods are duty paid and eligible for drawback. HMRC are publishing responses to the consultation document, Reform of the Excise Duty Drawback System, alongside the Budget.

Tackling counterfeit tobacco

The Government today announced the introduction of a covert security mark on packs of cigarettes and hand rolling tobacco to tackle the threat from counterfeit tobacco. The Government has been working closely with the tobacco industry and tobacco manufacturers will be implementing this scheme on a voluntary basis during the coming year.

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