The tax changes heralded in Brown’s tenth Budget indicate that ‘closing the
tax gap’ by cracking down on unacceptable tax avoidance remains a key aim.
As announced in the pre-Budget report, the disclosure of tax avoidance
schemes regime will be extended across all of income, corporation and capital
Secondly, following prior notification, targeted anti-avoidance provisions
will be introduced with the aim of closing down certain schemes.
This includes, for example, the use of manditorily convertible bonds to avoid
the loan relationship credit pick up rules.
Unfortunately, Brown appears to have overlooked the fact that taxpayers have
the right to pay the correct amount of tax, that it is the responsibility of
HMRC to ensure that the correct amount of tax is collected, and that EC law is
Controlled foreign corporation legislation will be extended to bring certain
companies that became tax resident outside the UK before 1 April 2002 within the
scope of the rules.
There are now three pending cases before the European Court of Justice
challenging the legality of the UK’s CFC system.
The advocate general’s opinion in the Cadbury-Schweppes v IRC case
will be handed down on 6 May 2006; and it is anticipated that the advocate
general will hold that the UK’s CFC system is a restriction on the fundamental
In Marks and Spencer plc v Halsey, the ECJ held that the UK
provisions constituted a restriction on freedom of establishment, because they
apply a different treatment for tax purposes to losses incurred by a resident
subsidiary and losses incurred by a non-resident subsidiary, and held that they
breach the principle of proportionality.
The ECJ also noted that the provisions ‘discourage undertakings from setting
up subsidiaries in other member states’.
The government welcomed the judgment, stating that the system of group relief
could be kept as it is now; and the Budget 2006 changes indicate that the
government’s ultra-minimalist approach to reform of an unlawful system will be
Cross-border claims will be restricted to the use by UK parents of
unrelievable losses of overseas subsidiaries; losses will have to be re-computed
according to UK accounting principles.
Relief will only be available for losses of a form that can be surrendered
under existing rules.
Hartley Foster is a director of the tax investigations and disputes team
at DLA Piper
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