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- Disguised remuneration
- Sale of lessor companies
- De-grouping charge
- Stamp duty land tax
- Tax administration
As expected, the Budget contains several provisions to clamp down on what is seen as unfair tax avoidance. These provisions are outlined in more detail below.
Disguised remuneration is where an employee or director is paid by a third party (often a trust) in an attempt to avoid PAYE and national insurance. Measures have been announced to ensure that disguised remuneration is taxed on the same basis as normal pay.
These arrangements have also been used in an attempt to provide a tax-advantaged pension above the statutory limits. The new provision will apply to assets or sums that are earmarked to provide income to an employee or director. The employer will be required to operate PAYE and class 1 national insurance on those sums or on the value of those assets.
A loan provided to an employee by a third party will also be taxed as pay. This change applies from 6 April 2011.
There is a further change to the law when a leasing company is sold. The objective is to ensure that all profits from leasing are taxed over the lifetime of the lease.
If a leasing business is sold to a new owner who has sufficient reliefs or losses, these could be offset against the leasing profits with the result that the leasing profits are not taxed. As a lease earns commercial profits before being taxed, this is seen as tax avoidance. There is a complementary provision to avoid double taxation of leasing profits. To prevent this, the law was amended to tax deferred profits when the company is sold. As a result of the recent economic crisis, this law was amended in December 2009 to allow the new owner to opt out of the charge. A consequence of doing this is that the profits are ring-fenced for the period remaining on the lease.
There is evidence that the amended law may fail to identify a company carrying on a leasing business, or may not tax the full amount of deferred profits. The law is being further amended for changes in ownership from 23 March 2011. Where the opt-out election has been exercised, the full value of the asset is taken into consideration in calculating the disposal value. The right to opt out is withdrawn from 23 March 2011.
The rules on de-grouping charges are tightened up. Companies in a group may generally transfer assets on a no gain/no loss basis. If the company then leaves the group, it was possible for the capital gain of the asset to escape tax. This is known as "enveloping".
To counter this, a de-grouping charge may be made which taxes the value of any such gain on an asset transferred up to six years before the transferee company leaves the group.
There is an exception if the transferor and transferee companies leave the group together. This is known as the "associated companies exception", and is set out in Taxation of Capital Gains Tax Act 1992 s179(2A).
Arrangements have been developed to exploit this exception. These include the transferee company leaving its new group to become a member of yet another group under the control of the original group. The relevant section of the 1992 Act is being rewritten so that the law operates as originally intended.
Three changes are introduced to prevent stamp duty land tax (SDLT) being avoided on the purchase of an interest in land.
Dishonest tax agents
Proposals are being developed to deal with dishonest tax agents. These include seizing their papers and publishing details on the HMRC website.
Time to Pay
Time to Pay is a scheme that allows tax to be deferred where a solvent business is experiencing short-term financial problems. The scheme was launched in 2008 and has been extensively used. The Chancellor has confirmed that this scheme will continue.
HMRC will be given a new power to collect data for risk assessment purposes. There will be a penalty for deliberately giving false data.
The Government has concluded that it cannot repeal the IR35 provisions but will simplify their administration. IR35 refers to when an individual sets up a company to provide his or her services in conditions which would otherwise comprise employment.
Disclosure of tax avoidance
The scope of the regulations for Disclosure of Tax Avoidance Schemes (DOTAS) is to be extended to include:
- income tax and national insurance avoidance schemes for employees
- schemes that incorporate offshore schemes to avoid corporation tax
- artificial loss schemes.
There is a separate initiative to look at areas of the tax code which have been repeatedly exploited in tax avoidance schemes. The first two areas are income tax losses and unauthorised unit trusts. Consideration will be given to rewriting the law so that it can better withstand such exploitation.
HMRC will publish a list of schemes that have already been disclosed and which it believes are ineffective but which are still being marketed.
Consideration is being given to devolving tax powers to the Northern Ireland Executive. This will include allowing it to charge a lower rate of corporation tax to compete with the low rates offered in the Republic.
As part of the process of simplifying tax law, legislation is being removed for various reliefs that have not been claimable for five years or more.