Briefing on the Finance (No 2) Act 2005
Originally sent: September 19, 2005As The Finance (No 2) Act 2005 received Royal Assent at the end of July, perhaps now is the time for a brief look at some of the provisions in this Act which impact on tax planning.
In April The Finance Act 2005 came into force. This Act contained the usual provisions of a Finance Act, establishing the rates of tax, thresholds, allowances etc. A number of the statements made in this year?s budget were not, however, included in this slimmed down Act, as the government did not want discussion of these to overshadow their election plans. They therefore reserved the more controversial measures for a further Act once they were safely ensconced in power again. It is this additional Act I am now considering.
Sections 24 to 31, and Schedule 3, concern themselves with what is referred to as ?Tax Arbitrage?. Basically, using an entity recognised as a legal person in more than one tax jurisdiction, and then taking advantage of a combination of the two sets of tax rules to reduce or avoid a tax charge. This avoidance scheme has tended to be used by rather large organisations. This is perhaps highlighted by the fact that the Revenue will ignore schemes which only achieve ?minimal? savings ? and here ?minimal? is widely believed to be less than ?50,000. I would imagine most family businesses are unlikely to be affected by these anti-avoidance measures.
There are anti-avoidance measures for Capital Gains Tax which may, however, affect some of your clients. These are contained in Sections 32 to 34, and concern various schemes which exploit residence rules. The Revenue are tightening up on such schemes in general, for all forms of taxation, as those of you who read my recent Financial Adviser article on the Shepherd case will appreciate. If you are planning to take advantage of a client?s temporary non-residence to avoid tax, make sure you have a full understanding of the current position on tax residence.
The two main changes for Capital Gains Tax planning are:
? Bearer shares and debentures in a UK company are now deemed to be located in the UK even if physically in another jurisdiction
? Temporary tax residence in another jurisdiction where a tax treaty allows that jurisdiction to tax the individual will not exempt the individual from tax in the UK where the total tax paid is less than would otherwise be paid.
The second of these changes is highly provocative, and would appear to be in breach of international law. Effectively, it means the UK is now refusing to abide strictly by the terms of tax treaties it has signed. I think we are likely to see a challenge in the courts the first time the Revenue try to use this Section on a well financed or well supported taxpayer. Watch this space! In the meantime, perhaps you should think twice before suggesting a client use the ?Belgium Plan? or other similar tax residence based avoidance scheme.
Adviser Breakthrough Training Solutions Ltd. takes no responsibility for loss occasioned by any person acting or refraining from action, or in consequence of any other person acting or refraining from action, as a result of the material in this article.
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