UK Government Announces Tax Clampdown On Structured Finance Arrangements

by Robert Lee, Tax-News.com, London

08 June 2006

The UK Government has announced that legislation will soon be introduced that is designed to crack down down on the use of structured finance schemes which allow banks and large businesses to avoid corporate tax.

HM Revenue and Customs announced on Tuesday that new laws to be introduced at the report stage of the Finance (No. 2) Bill will seek to prevent avoidance of tax by the factoring of taxable receipts or the creation of tax-deductible expenses in return for a lump sum that is not taxed as income.

The draft legislation deals with arrangements which, in economic terms and for accounting purposes, are secured loans, but where the legal form is that of a transfer of an asset.

According to the government, avoidance schemes have come to light which involve a person who holds an asset from which income or taxable receipts, such as trade receipts, could arise disposing of that asset for a lump sum. The sum equates in substance to the receipt of loan finance, with the receipts foregone representing repayment of that loan plus interest. It is claimed that the income or receipts are not taxable (or the expense is tax deductible), while the lump sum either gives rise to a capital gain or is not taxable at all.

The transaction would be accounted for as a loan in accordance with its economic substance, but the tax effect the borrower seeks is the obtaining of tax relief not only for the ‘finance charge’ but also the principal of the loan.

The government considers that such arrangements should be taxed in accordance with their economic substance rather than their legal form, and that it should not matter what the nature of the transferred asset is.

Under the new legislation, which came into effect on June 6, the borrower will be taxed as if it had entered into a normal loan.

The government is soliciting views from affected parties, before the amendment is tabled, on whether certain legitimate transactions should be excluded from the arrangements. HMRC is also holding an 'open day' relating to the changes on June 20.

According to the Financial Times, Revenue officials have estimated that the measures could raise "hundreds of millions and potentially billions" for the Treasury.

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