Tax Experts Warn New Anti-Tax Avoidance Measures Will Hurt UK Competitiveness

by Jason Gorringe, Tax-News.com, London

27 May 2005

Tax experts have expressed dismay at the UK government's renewed drive to clamp down on corporate tax avoidance, warning that the newly-drafted measures, dropped prior to the general election for lack of parliamentary time, are unnecessarily stringent and likely to damage the UK's competitiveness.

Among the measures causing most concern is a provision known as 'Section 91B.' This targets tax schemes that involve converting interest into capital through the issue of shares. Many companies believed that the original draft would impose double taxation on commonly used transactions.

The government says it has responded to such concerns, and has also modified controversial legislation dealing with tax 'arbitrage', where firms seek to exploit differences between national tax systems. However the new wording is still being criticised by international companies for reducing the attractiveness of the UK and introducing uncertainty.

Nonetheless, the government insisted that the new legislation had been “tightly targeted to ensure it does not catch normal commercial structures which do not involve avoidance.”

"The government believes that the measures introduced by the original Finance Bill presented to the House are essential for an effective, principled, targeted and fair tax system, that maintains the UK's competitiveness, but acts where there is a loss to the UK Exchequer. This new Finance Bill fulfils our commitment to reintroduce these clauses," Paymaster General Dawn Primarolo explained yesterday.

Tax experts have strongly disagreed with the government, arguing that the lack of consultation time means that the measures are badly drafted and will lead to increased uncertainty for multinational firms.

Chas Roy-Chowdhury, Head of Taxation at the Association of Chartered Certified Accountants warned that: "Retrospection (back to March 16) and complex anti-avoidance measures are precisely what business does not need and exactly what this finance bill introduces."

Mr Roy-Chowdhury continued:

"Large businesses will be particularly hit by the anti-avoidance provisions in this bill, which seem to propose the UK tax authorities policing multinationals. Companies will now be prevented from receiving double-dip relief in two different jurisdictions if they use so-called hybrid entities or instruments."

Mr Roy-Chowdhury also lamented new measures on pensions which will tax the lump sum of an individual who agrees to defer taking up his/her state pension by five years.

"This is a blow and is not a move that will help with the pensions crisis. We had hoped that these lump sums would be tax-exempt but they will now be taxable at anything up to 40%."

The Treasury has indicated that the new legislation will be granted Royal Assent by the end of the current parliamentary session in July, giving nine weeks for members to scrutinise the measures.

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