Pre-Budget Report: Anti-Avoidance Measures

A number of fresh anti-avoidance measures have been announced:

Capital allowances

Measures were announced in July 2009 to prevent the transfer of the benefit of "latent capital allowances" between groups of companies. Latent capital allowances arise where a company restricts claims for capital allowances, perhaps because it is loss-making, with the effect that the tax written down value of plant and machinery exceeds its balance sheet value. A group acquiring the company could exploit the allowances by using them against its profits by way of group relief, or by "injecting" profitable activities into its newly-acquired subsidiary.

The provisions announced in July were intended to combat these techniques, but contained a number of defects that are addressed in the measures published today. In particular, the original provisions dealt only with changes in ownership of a company when it was sold by one group to another. The rules will be extended to cover a sale by individuals or trusts.

Also announced were measures designed to counter two types of avoidance involving structured finance arrangements incorporating the leasing of plant or machinery. The lessor company could sell the right to the lease rental income outside the scope of corporation tax, but become entitled to claim capital allowances on the full cost of the asset, and to a deduction for the rebate payable to the lessee on termination of the lease.

This would generate a tax loss, with no concomitant economic loss.

The Finance Bill will contain counter-measures effective from today.

Comment: This represents a further assault on perceived abuses of the capital allowances rules by companies.

Life insurance companies

Legislation will be included in the Finance Bill to prevent the manipulation of the recognition by life companies writing different types of business, of profits in a non-profit fund. HMRC has become aware of arrangements whereby certain deferred profits can escape tax altogether. The measures will apply to periods of account beginning on or after 9 December.

Comment: The provisions reflect the outcome of consultation with the insurance industry announced in July.

Inheritance tax

Two schemes involving trusts have been stopped. One is where either a sum is transferred into a trust and the transferor reserves a future interest in the trust or where a person buys a future interest in the trust. In the past the trust interest was outside the 40% tax charge. The tax will now be charged when the future interest arises or is transferred. The other involved buying an interest in possession under a trust which had the same result. From now on the purchased interest will be treated as if it was in the buyer’s estate and taxed accordingly.

Comment: Both schemes exploited weaknesses in the legislation and it is no surprise that they have been stopped.

Sale of equipment lessors

Legislation was introduced in 2006 to prevent tax timing differences being exploited on the sale of lessor companies. It has been possible to avoid the effect of the legislation where the lessor company is indirectly (as opposed to directly) owned by a consortium of companies. New legislation will address this anomaly.

The same legislation has prevented commercially motivated sales from taking place, so a lessor company can elect to recoup the tax timing benefit provided that it ring fences its relevant income.

Comment: The latter measure is a welcome relaxation.

Financial Instruments

Companies holding index linked gilt-edged securities were able to increase their carrying cost if RPI increased. This resulted in a tax-free profit. This profit will be no longer tax free.

Multinational groups can achieve higher returns or reduce borrowing costs where there is a foreign exchange risk by hedging. If the hedging transactions are fragmented amongst various group companies then a member of the group can obtain a greater tax loss than the real overall loss. From today the loss is to be restricted to the real overall loss.

Comment: Another example of complex legislation requiring fine tuning. Opinions will no doubt differ as to what the real overall loss actually is!