Anti Avoidance Measures

Chancellor Continues His Drive Against “Artificial Manipulation.”

There are a range of measures contained within the Budget Notes above and beyond the increases to the small companies' rate of corporation tax. Some of the changes proposed include a rule to counter tax schemes relating to creating and using artificial capital losses. There are also measures restricting tax relief which employers can claim in relation to contributions to employee benefit trusts thus restricting the relief to the levels actually paid to employees in taxable forms.

Changes to HMRC's Criminal Investigation Powers

Legislation will be introduced to provide consistent powers and safeguards for all HM Revenue & Custom's (HMRC) criminal investigations and to repeal existing powers that will no longer be needed. The consultation document in this area referred to the differences between the ex-Inland Revenue and ex-Customs powers. Revisions are proposed to the Police and Criminal Evidence Act 1984 (PACE) so that PACE can be applied to HMRC matters. In particular, the appropriate powers and safeguards are those already applied to criminal investigations by HMRC concerning ex-Customs and Excise matters and these include:

• applying to magistrates and judges for search warrants
• applying to judges for court orders to obtain evidence from people other than the suspect
• arresting suspects, search upon arrest and questioning.

One major difference between the ex-Inland Revenue and ex-Customs and Excise in terms of criminal investigation powers was that ex-Inland Revenue staff had no power of arrest. The Consultation document referred to this as being a barrier to swift action in criminal investigations. It also resulted in the merged HMRC having to use separate teams when conducting criminal investigations. This matter is now being addressed.

Changes to Penalty Regime

Changes are also being proposed to penalties for incorrect returns. The proposal is to introduce a single penalty regime for incorrect returns for income tax, corporation tax, PAYE, National Insurance Contributions (NIC) and VAT where the penalty will be determined by the amount of tax understated, the nature of the behaviour giving rise to the understatement and the extent of disclosure by the taxpayer. The proposals also introduce the new concept of suspended penalties.

It is proposed that the current penalty provisions for incorrect returns of income tax, corporation tax, PAYE and NIC and VAT will be repealed to be replaced with a single penalty regime to apply to inaccurate returns, claims, accounts and other documents for each tax. The new penalty categories will include the following:

• no penalty where a taxpayer makes a mistake
• moderate penalties for failure to take reasonable care
• higher penalties for deliberate action
• higher penalties for deliberate action with concealment.

In line with the consultation document great play is being given to taxpayers' making a disclosure within the new penalty regime, particularly if the disclosure is unprompted.

Clauses will be included in the Finance Bill for the measure of tax lost, which will guide the end penalty, to be calculated before setting off group relief for companies. Also provisions will be added for calculating tax lost in special circumstances, such as where there is an overstated loss or the inaccuracy in a return results in tax being declared late rather than not at all.