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Brown Focuses On Tax Compliance In UK Budget

by Jason Gorringe, Tax-News.com, London

19 March 2004

Leaving the main tax rates unchanged, Chancellor of the Exchequer, Gordon Brown chose to focus on tax compliance in the 2004 UK government budget, which included a widely expected measure to tax the dividends of small incorporated firms.

Confirming recent speculation, a new disclosure rule will require tax scheme promoters to provide details of certain defined schemes and arrangements to the Inland Revenue shortly after a scheme is sold. They will be required to provide a description of the scheme, including details of the types of transactions planned, the tax consequences of the arrangements, and the statutory provisions that they rely upon. Penalties will be applied for non-compliance with this rule.

In addition, businesses with an annual turnover of £600,000 or more using VAT avoidance schemes that appear on a statutory list, and businesses with an annual turnover of £10 million or more using VAT arrangements that meet certain criteria, will be required to notify HM Customs and Excise.

The government is also taking action to close a number of loopholes that it believes are currently being exploited to avoid tax, including:

  • Preventing company profits from being wrapped up in a partnership structure and extracted as untaxed or low-taxed capital receipts;
  • Stopping two avoidance schemes where users obtain a double relief for the cost of capital assets used in their business;
  • Countering avoidance by life companies using financial reinsurance; and
  • Further measures to prevent exploitation of loopholes in the VAT system.

The government stressed that its decision to levy income tax on pre-owned assets, which takes effect from April 2005, would not affect legitimate transactions between family members, and emphasized that the measure:

  • Will not affect parents or grandparents who have helped their children or grandchildren onto the property ladder;
  • Will not affect transactions between married couples;
  • Will not apply where the benefit is incidental;
  • Will not apply if the assets still count as part of the taxpayer's estate for inheritance tax purposes;
  • Will not apply if a person who has used a contrived avoidance scheme to remove their property from the inheritance tax system opts to bring the property back into their estate for inheritance tax purposes; and
  • Is not retrospective as it will not take effect until April 2005.

As expected, Brown announced that a 'loophole' enabling owners of small companies to avoid tax by paying themselves dividends will be brought to end by a 19% tax on 'distributed profits'. However, the Chancellor has left in place the incentive he introduced in a previous budget exempting the first £10,000 of a firm's profits from income tax.

Other measures announced included an extension of first year capital allowances for small firms investing in plant and machinery to 50 per cent from 1 April 2004 for one year, after which the measure will be reviewed.

Brown also confirmed that tax relief for the film industry, due to expire on July 1 2005, will be replaced by a new scheme allowing production costs to be written off against profits or submitted to the Treasury for a cash payment. According to the Inland Revenue, the new measure will provide filmmakers with 20% of their production budget, compared with 15% offered under the existing Section 48 scheme.

The creation of tax-friendly UK property investment trusts is also on the horizon, after Brown announced that he accepted much of the Barker review of under-supply in the property market. A further consultation is to report on the issue of introducing US-tyle REITS in the UK.

The Chancellor also announced the expected merger of the Inland Revenue with Customs & Excise in a bid to reduce administration costs and red tape for business, after accepting the findings of a review by senior Treasury civil servant Gus O'Donnell.

The full 2004 UK Budget Report can be found in the Tax-News Resources Section.

 

 






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