REV BN 22: Financial Avoidance

Who is likely to be affected?

1. Persons liable to income tax or corporation tax who enter into avoidance arrangements which involve a financial product.

General description of the measure

2. This measure blocks a number of avoidance schemes which have been disclosed to the Revenue under the disclosure rules introduced in Finance Act 2004.

3. The following schemes are blocked:

a) Avoidance of income tax by individuals using stripped corporate bonds.

b) Avoidance of tax by companies acquiring debt securities by way of stock loans or sale and repurchase (repo) agreements.

c) Exploitation by companies of a hole in the loss buying rules for non-trading loan relationship losses.

d) Generation of artificial capital losses by companies using capital redemption bonds.

e) Conversion by companies of interest-like income into either a capital gain or a tax nothing using shares or derivatives over shares.

f) Exploitation of the group continuity rules for loan relationships and derivative contracts to convert income into capital or take advantage of different accounting methods used by different group companies.

g) Rent factoring schemes which attempt to get around the Finance Act 2000 antiavoidance rules by arranging deals which slightly exceed the 15-year rule.

h) Schemes which exploit the relief available to companies for annual payments as charges on income.

4. In addition, the measure will also put it beyond doubt that an income tax scheme involving a stock loan of gilts which is said to result in a double deduction under the manufactured interest and Accrued Income Scheme rules will not work.

5. Announcements were made in respect of the first two schemes on 2 December 2004, and in respect of the third and fourth schemes on 10 February 2005 (see News release 03/05).

Operative date

6. The changes apply to schemes (a) and (b) above from 2 December 2004, and apply to schemes (c) and (d) from 10 February 2005.

7. The changes apply to scheme (e) in relation to profits accruing on or after Budget day.

8. The changes apply to scheme (f) in cases where a company ceases to be a member of a group on of after Budget day.

9. The changes apply to scheme (g) for arrangements entered into on or after Budget day. In addition, for interposed lease cases where the finance arrangement was entered into after 20 March 2000 but before 16 March 2005 and to which the rent factoring rules did not apply, no deduction will be available for rent
paid which relates to a period after 16 March 2005.

10. The changes apply to scheme (h) in respect of payments made on or after Budget day.

11. The clarification of the rules for income tax relief on manufactured interest will apply to payments made on or after Budget day.

12. The other measures apply to profits accruing on or after Budget day.

Current law and proposed revisions

13. In outline, the proposed changes will block the schemes as follows:

a) Strips of corporate bonds will be brought within the Relevant Discounted Securities regime so that profits accruing will be taxed as income in the same way as applies to gilt strips.

b) The loan relationships rules will be amended to ensure that all profits, and not just interest, in respect of debt securities acquired by stock loan or repo are brought into tax.

c) The loss buying rules will be amended to ensure that non-trading loan relationship losses cannot be carried forward beyond the date of a change of ownership which is accompanied by one of the events listed in section 768B(1) ICTA 1988.

d) Generation of artificial capital losses on capital redemption bonds will be prevented by bringing such bonds within the scope of the loan relationships rules for companies, which means that no allowable loss can arise in respect of those bonds.

e) Conversion of income into capital or into a tax nothing will be stopped by:

• bringing certain shares within the ambit of the loan relationship rules;
• ensuring that all derivatives over shares are within the derivative contracts rules, unless the contract is used to hedge an asset to which the chargeable gains rules apply; and
• extending the scope of the income charge under the loan relationships rules on simple money debts to include discount and profits relating to interest.

f) Exploitation of the group continuity rules will be stopped by adding a de-grouping charge on similar lines to that which exists for the equivalent capital gains and intangibles fixed assets rule for intra-group transfers. It will also be made explicit that where an asset is transferred between two group companies which have different accounting methods, no profits can fall out of charge. Finally, the loan relationships arm’s length rule will be amended to ensure it interacts properly with the group continuity rule so that there are no cases where neither rule applies.

g) The 15-year exception for rent factoring schemes will be abolished.

h) Annuities and annual payments (other than donations to charity and payments falling within section 587B ICTA) will no longer be treated as charges on income, so that relief will fall to be given under the management expenses regime which has its own anti-avoidance rule.

Further advice

14. If you have any questions about these changes, please contact Chris Kerr on 020 7147 2619 or Richard Thomas on 020 7147 2558. Information about Budget measures is available on the Inland Revenue website.

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