HMRC goes on £1bn retro warpath

The clock has been turned backwards by HM Revenue & Customs with its latest clampdown on alleged corporation tax avoidance, which is set to rake in £1bn retrospectively and £1bn a year from 2011.

The taxman has scored a number of key successes this year in its corporate tax crackdown efforts, but its latest victory has raised the stakes with retrospective application of a loophole closure linked to companies making “manufactured payments”.
This particular scheme is related to manufactured payments received by companies involved in sale and repurchase, or “repo” transactions.

It comes after a recent High Court ruling that retrospective legislation is not a breach of human rights.

Tax advisers from both the accounting and legal professions warn that it opens the door for a broader strategy of backdating tax rules when HMRC sees fit.

Such a strategy could destabilise the certainty of a company’s tax position, which in turn could dent confidence in the UK as a place to set up a business.

KPMG said in a tax briefing: “First, a tax system which is prepared to rewrite history by such retroactive legislation may be less attractive to potential investors who seek certainty of their tax position and thus may damage UK competitiveness.

“Second, it is not clear whether the government has changed its view on when it will be prepared to use such retroactive legislation.”

In the rare occasions when a tax has been applied retrospectively the taxman has previously warned it was looking at that course of action. The latest instance appears to be a hardening of its stance, according to Caspar Fox, partner at law firm Eversheds.
“Previous warning has not been given here, and so closing this tax loophole retrospectively seems to be another sign of HMRC’s increasingly aggressive attitude towards perceived tax avoidance.”

But the taxman is unmoved, as it looks to close opportunities for plcs to take advantage of special dividend payments, which commentators say is unsurprising as companies have been pumping money into such ­vehicles in the run-up to introduction of the 50% income tax rate in April. HMRC will be eager to know the dividends are not disguising
bonus payments.

The latest move doesn’t signal a policy change, said an HMRC source, but it will use this strategy where it sees fit – opening up the possibility for similar tax backdating in the future.

An HMRC spokesman said: “HMRC has always had a responsibility, and will continue to, counter any scheme that is being used by individuals and businesses to avoid their
tax obligations.

“Where such schemes come to light, they will be closed down in the most appropriate and effective way.”

IN OUR VIEW

HMRC’s move seems to go against the principle that the taxpayer is taxed on the wording of the legislation in place at the time of their actions. Therefore jittery plcs will be even more nervous about remaining in the UK and the measure is another in a long line of tax rules that have raised the hackles of UK business – where will it end?

Further reading:

CIoT greatly concerned by retrospective tax action