Compliance and Anti Avoidance

Individuals not domiciled or not ordinarily resident in the UK are currently taxed on overseas income and capital gains only at the time of remittance to the UK.

From April 2008:

	After being resident in the UK for seven years, individuals will have the choice of paying tax on their worldwide income and gains or an annual £30,000 of tax over and above that payable on the remittance basis
	Days of arrival in and departure from the UK will be included as days ‘in’ the UK in establishing whether or not an individual is resident in the UK for tax purposes
	Unless unremitted foreign income is less than £1,000 a year, those claiming the remittance basis will lose their entitlement to UK personal income tax allowances.

From 6 April 2008 the general remittance basis (as outlined above) will apply to such income.

Legislation will be introduced in the Finance Bill 2008 to ensure that the rules that spread tax relief for large employer pension contributions relative to their contribution in the previous year cannot be circumvented by routing them through a new company.

The measure will have effect for payments made on or after 10 October 2007 under binding obligations entered into on or after 9 October 2007.

Following the widely publicised decision in the Arctic Systems husband-and-wife business tax case, the Government has confirmed that it believes it is unfair for one person to arrange their affairs so that their income is diverted to a second person, subject to a lower tax rate, to obtain a tax advantage (income shifting). The vast majority of individuals cannot shift their income and income shifting is considered to run counter to the principle of independent taxation.

The Government will be consulting, shortly after the Pre-Budget Report, on draft legislation to take effect from 2008/09 to address income shifting. The legislation will work alongside the existing rules on businesses deductions and settlements, and will seek to remove the tax advantage obtained from income shifting. It would only apply when the income is in the form of distributions from a company (dividends) or partnership profits.

Income from employment, interest on savings and any other source will not be affected.

HM Revenue and Customs will draw on the wide range of commercial experience available across the advisory community in framing practical guidance that minimises burdens, and makes it as easy as possible for individuals to understand their position. Relevant factors to consider when establishing whether or not income shifting has taken place could include the work done by the individuals in the business, the investments made and the risks to which they are subject through the business.

The exemption from national insurance contributions (NICs) of holiday pay paid via a third party is to be removed for all sectors outside the construction industry. The exemption was aimed at addressing problems of high mobility and turnover of the labour force in the construction industry, but working time regulations now ensure holiday entitlement is preserved in all sectors and therefore an ongoing exemption for construction is no longer appropriate.

However, given the longstanding nature and wide range of benefits typically provided by schemes, the exemption will be maintained for the construction industry for five years to give it sufficient time to adjust.

Employers outside this sector are increasingly using the exemption solely to reduce their and their employees’ NICs liability, and therefore secondary legislation now laid before Parliament will remove the exemption for these employers from 30 October 2007.

Disclosure Regime
Budget 2004 introduced a disclosure regime that has enabled the Government to respond to tax avoidance more swiftly and in a more targeted fashion.

In order to better identify and tackle those who make use of marketed avoidance schemes, the Government will consult on options to improve the operation of Scheme Reference Numbers.

Following on from action in 2006/07 on stamp duty land tax avoidance, the Government will consult with interested parties later this year on how to extend the disclosure regime to high value residential property transactions.

The Government will also consult with interested parties later this year on the practicalities of addressing the use of special purpose vehicles to reduce stamp duty land tax liability on high value residential property.

Financial Products - disguised interest
Action is being taken, effective immediately, to counter attempts by some companies to get around the shares as debt rules, which apply to interest income disguised as a capital gain or ‘tax nothing’.

Interest relief exploitation
Action is being taken, effective immediately, to tackle avoidance schemes seen as abusing the availability of interest relief through the payment of interest in advance.

Leasing avoidance
Action is being taken, with immediate effect, to prevent two types of arrangement that seek to avoid tax through the leasing of plant and machinery. The measures will counter avoidance involving the sale and finance leaseback of plant or machinery and attempts to exploit long funding leases to create a tax loss where there is little or no commercial loss.

Life Insurance Companies
Legislation will be introduced to prevent life insurance companies from benefiting from tax relief for expenses in respect of reinsured business which have been met by the reinsurer of that business.

This will apply to transactions entered into on or after 9 October 2007 (and from 2008 to amounts spread forward in respect of earlier transactions).

Tackling Vehicle Excise Duty (VED) Evasion
To assist in the fight against VED evasion, the Government has now strengthened VED enforcement powers to include motorists driving unlicensed vehicles and parking in areas where enforcement is not currently permitted.

Therefore in addition to public roads, from 1 September 2008 VED enforcement will also cover vehicles parked in public places that are not intrinsically part of a private dwelling, where a Statutory Off Road Notification has not been made.