Tax dodge outlawed

Company purchase schemes used to dodge payment of corporation tax worth #100m a year are to be outlawed by the government. Corporate tax experts forecast the move could lead to a raft of extra warranties and indemnity clauses being inserted into company sale deals.

Dawn Primarolo, the financial secretary to the Treasury, last week revealed new legislation to counter the ‘abuse’ will be included in the Finance Bill.

Chancellor Gordon Brown outlined his intended clamp-down – one of up to 200 expected in his 17 March Budget – in his first Budget last July.

Alternative schemes have been developed since the last government attacked the area in 1994. Common dodges include ensuring any tax liability is deferred until an accounting period starting after 1994 or selling companies with a title to receive income profits in the future, but arranging it so the tax is never paid.

In future the Inland Revenue will target companies under new ownership where a likely tax liability has not been paid for six months after it was due.

The department will also be able to secure information from taxpayers on whether a sold company or the vendor is liable to a tax charge.

Primarolo said: ‘The government is determined to curb tax avoidance, and will act to counter any further attempts to get round the rules on company purchase and abandonment.’

She confirmed the rules will be backdated to the current provision’s start date in order to counter variants of the schemes.

Rosalind Upton, Ernst & Young’s corporate tax partner, said: ‘There are going to be a lot more warranties and indemnities slotted into sale agreements to cover possibilities that are extremely unlikely in practical terms.’

She added: ‘The 1994 changes were very easy to get round but reputable advisers would not be recommending a course of action like this.

The government is clearly concerned by the annual tax loss and is acting to stop it.’

Practitioners have until 31 March to comment on the draft legislation.

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