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UK Announces Anti Avoidance Measures

Friday, December 17, 2010

The UK government has announced a number of proposals in its draft Finance Bill to tackle tax avoidance, particularly in relation to intra-group transactions, their financial reporting, and inheritance taxation.

Under the plans, from April, families seeking to mitigate an inheritance tax bill through the use of trusts have been warned by the UK tax authority, HM Revenue and Customs (HMRC), that they will be required to disclose such structures to allow the Authority to scrutinize their compliance with UK tax law. HMRC has said that greater access to pertinent information would enable it to assess the level of IHT avoidance, and introduce ‘counter arrangements’ to ensure that taxpayers operate within the ‘spirit’ of the law. The move has been seen by many as a precursor to the introduction of prohibitive rules that will significantly restrict UK taxpayers’ ability to implement tax efficient arrangements for their beneficiaries.

Under the April rule change it has been disclosed that HMRC will not automatically notify the promoter that has made the disclosure of whether the proposed scheme will be shut down, instead requiring that they ask whether it will be deemed unlawful.

There will be no retrospective requirement to disclose existing schemes; penalties however will be handed down to promoters of new schemes subsequent to the law change if they are not punctually disclosed.

The second measure, that has yet to be adopted, is the proposed introduction of a General Anti-Avoidance Rule (GAAR), discussions on which are ongoing. The government has highlighted its intention to tackle groups of companies and multinationals that use tax mitigating techniques to slash their tax liability. In particular, the Treasury told the Financial Times that it plans to adjust existing legislation to better target companies whose balance sheets fail to fully recognize “amounts that are taxable under rules on loan relationships and derivative contracts,” and also to tackle the manipulation of currency fluctuations in companies’ financial reporting.

According to the Financial Times, a commercial tax lawyer, Graham Aaronson is to lead a study on the introduction of a general rule, a report on the findings of which is expected on October 31, 2011. Heeding companies’ concerns about the measure, the Treasury has confirmed that the government would not introduce a GAAR before formal consultation had taken place.