Leased Plant and Machinery
HMRC have confirmed and extended anti-avoidance legislation, first proposed on 13 December 2007.
The measures are targeted against two specific schemes which seek to generate a tax loss where no commercial loss is present.
The first scheme is “mismatched lease chains” by which intermediate lessors would take advantage of the different tax treatment of the receipts (taxed only on the finance element of rental receipts) but as lessee obtained a tax deduction for the full lease payments.
The second scheme uses arrangements involving the grant of a long funding finance lease for a premium plus a small amount of annual rentals. The premium largely escaped tax as no disposal value was brought in under the capital allowances regime and there was little or no charge as a capital gain. The new measure seeks to tax the entire premium as income of the lessor where they would not otherwise be taxable.
The above changes generally apply to arrangements entered into on or after 13 December 2007.
In addition, some further changes have been made to draft legislation first published on 9 October 2007 to deal with certain “sale and finance leaseback” and “lease and finance leaseback” arrangements.
Comment: HMRC have been targeting perceived tax avoidance in the leasing industry for many years. This is confirmation of HMRC’s approach of clamping down on schemes which it feels are abusive and do not reflect commercial reality.
Disguised Interest
Following the Pre-Budget report in October last year, HMRC published its consultation document on financial products avoidance on 6 December 2007. The consultation proposed replacing existing detailed anti-avoidance legislation with “principles-based” anti avoidance rules for “disguised interest”, the term used to describe amounts that in substance are interest but which are designed not to be taxable as interest. The measures are specifically targeted against schemes that had been notified to HMRC under the disclosure rules.
Since the Pre-Budget Report, there have been open meetings with HMRC and substantial representation from professional bodies and the Chartered Institute Of Taxation regarding the timing of the introduction of the new rules as well as the scope and possibly wide application of the rules. Subsequently, HMRC issued revised draft legislation with commentary and guidance on 7 February.
The announcement today states that legislation will be introduced in Finance Bill 2008 to block certain defined schemes and will impact credits, debits and other returns on or after 12 March 2008. In addition, HMRC will continue to work to introducing a “principles-based” approach into legislation in Finance Bill 2009.
Comment: HMRC’s decision to defer the introduction of the “principles-based” rules is welcome and will allow sufficient time for adequate consultation and representation to ensure the legislation works as intended.
Intangible Assets
The existing rules allow for a tax deduction for corporate intangible assets created on or after 1 April 2002 or transferred between unrelated parties on or after the same date.
“Existing assets” (eg assets created before 1 April 2002) could therefore fall within the new, more favourable, tax rules if they were transferred between unrelated parties. Previously it may have been possible for a company to be unrelated to another if it was in liquidation or administration. This meant that assets transferred from such a company could be treated as falling within the new regime. New rules, introduced today, effectively seek to ignore the liquidation / administration in determining whether a company is related to another, thereby closing down another loophole. This is therefore one more of those planning techniques that has now been closed down.
Comment: Since the latest rules for the taxation of intangible assets was introduced in 2002, there have been a number of planning techniques and schemes which have sought to obtain a tax advantage from what would otherwise be “existing assets” (eg assets created before 1 April 2002) by bringing them within the new rules. Many of these techniques have been closed down by HMRC.
Controlled Foreign Companies (‘CFCs’)
The CFC legislation aims to counter the artificial diversion of profits from the UK so as to escape UK tax. It applies to companies which are controlled by UK residents and charges tax on the UK company which owns the CFC. There are a number of exemptions from the CFC rules, including ones which prevent companies established in ‘acceptable’ territories or undertaking ‘acceptable’ activities from being caught by the rules.
HMRC have become aware of some schemes which have sought to get round the CFC rules altogether by:
• using a partnership or trust to own at least 50% of the shares in foreign company;
• misusing an exemption, such as the acceptable distribution policy; or
• arranging profits to fall outside the scope of the CFC rules by arranging for non-dividend income to accrue to a partnership in which a holding company has a controlling interest. This aims to exploit the holding company regime in the exempt activities test.
Changes have been made to counter these schemes, which are effective from 12 March 2008.
Comment: The whole issue of the taxation of foreign profits of companies is under review and is likely to be the subject of major reform in 2009. In the meantime, we are left with an unsatisfactory position as regards CFCs in the EU, since the Government’s response to the Cadbury Schweppes case does not comply with the ECJ’s judgment.
