UK Tightens Corporate Tax Rules In Three Areas Under Disclosure Regime

by Robert Lee, Tax-News.com, London

14 February 2005

UK Paymaster General, Dawn Primarolo, has announced the introduction of new measures to prevent tax avoidance by companies in three areas, including foreign tax credits, capital redemption bonds (CRBs) and ‘loss buying.’

Under a technical note issued at the time of Chancellor Gordon Brown’s pre-Budget report last year, relief for foreign tax on income received as part of a company's trade will be restricted to the UK tax on the net profit derived from that income.

The change was initially due to enter into force on Budget day. However, the Treasury has seen fit to bring the rule forward so that it will apply to income received from February 10.

CRBs, a form of investment or deposit which is made with an insurance company rather than a bank, are treated for tax purposes as an insurance policy rather than as company debt investment or deposits. It is alleged by the Inland Revenue that firms can create a wholly artificial capital loss through the use of CRBs and as a result, the Finance Bill will remove the exemption that CRBs have from the legislation on corporate debt.

The loss-buying rules deal with cases where a company is bought wholly or partly for its tax losses rather than its economic activities or assets.

Where a company has a loss arising from interest payments on its debt liabilities which do not relate to any trade, the loss-buying rules previously did not prevent the loss from being carried forward over a change of ownership.

However, as of February 10, firms are no longer able to carry forward such losses.

The new CRB rules are also effective from the same date.

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