The UK government is maintaining its attack on corporate tax avoidance with the introduction of three new measures. The initiatives arise from the 2004 pre-Budget report (PBR) and Finance Bill.
On February 10 2005 Dawn Primarolo, the minister responsible for the tax system, announced a limit to the relief claimed for foreign tax paid on trade receipts, the removal of capital redemption bonds' exemption from loan relationships legislation and a ban on buying companies that have incurred losses to avoid tax.
The steps against claiming excessive foreign tax relief, which were published at the time of the PBR in December 2004, will be included in the 2005 Finance Bill. They will prevent taxpayers from claiming a credit of any more than the UK tax on the foreign tax paid on trade receipts. The rule will come into force on the day of the Budget in March. Before then the rule will apply in cases of "the acquisition of income on which foreign tax is paid" and where the intent is to obtain relief of more than the UK tax on the profits from the scheme or arrangement.
The move against the status of capital redemption bonds (CRB) will also be included in the 2005 Finance Bill, though the rules apply from Primarolo's announcement on February 10 2005. As a CRB is a form of investment or deposit placed with an insurance company rather than a bank, it comes under the tax rules governing insurance policies, and not company debt investment or deposits. According to the Inland Revenue, "this is alleged to have the effect that a company can create a wholly artificial capital loss". To prevent this, the Finance Bill will bring CRBs into the legislation on corporate debt, which does not allow capital gains or losses to be created on assets.
At the moment the rules do not stop a taxpayer from carrying forward a loss from an acquired company's interest payments on debt which did not arise from any trade. From February 10 2005, where the loss buying rules operate, a taxpayer that buys a company cannot carry forward any of its purchase's non-trading loss on debt allocated to the period ending before the change of ownership.
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