Brown Promises Tax Fairness In Pre-Budget Report

by Jason Gorringe, Tax-News.com, London

07 December 2006

A package of measures aimed at ensuring certainty and equity in the tax system were contained in the Pre-Budget Report delivered by UK Chancellor Gordon Brown yesterday.

The measures, which aim to 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.

The key measures contained in the Pre-Budget report in this area are as follows:

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.

This, according to the Chancellor, 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 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 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. This follows a recent House of Lords decision and restores the balance of interests secured by such a limitation. 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.

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.

Protecting Pensions Tax Relief

The Government 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.

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.

With regard to the issue of tackling tax avoidance, meanwhile, the Chancellor unveiled the following measures:

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.

Targeted Anti-Avoidance Rule for Capital Losses

The Government 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.

Stamp Duty Land Tax - Closure of avoidance schemes

Measures to counter avoidance of stamp duty land tax will come into force immediately. 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.

Taxation of Companies - Closure of avoidance schemes

The Government announced measures, effective from Wednesday, 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.

With regard to Missing Trader Intra-Community Fraud, also known as 'carousel fraud', it emerged that the government's strategy for tackling such activity has been strengthened 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, who have been tasked with 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

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