Clampdown on dodgers expected to yield pounds 1.6bn

The Chancellor signalled the Government's intention to be "relentless" in its protection of the public purse from tax-avoiders by announcing new measures to block loopholes and an Inland Revenue review of the feasibility of a general anti-avoidance scheme.

The measures taking effect with immediate effect demonstrate Mr Brown's determination to "counter leakage and avoidance of tax whenever and wherever necessary", said the Treasury. It is calculated the proposals will yield more than pounds 1.6bn by April 2001.

Announcing that the Revenue's wide-ranging review was likely to lead to further measures in future Budgets, Mr Brown outlined four key proposals.

There are also a number of VAT measures and one on insurance premium tax that will protect up to pounds 2bn in revenue and raise pounds 10m this year and pounds 20m next year.

Moreover, the Government intends to change and modernise the rules for multinationals in the next Budget. Under the new rules, companies will be required to apply the arm's length basis for transfer prices in calculating taxable profits in their tax returns and UK companies will be required to include amounts chargeable under the controlled foreign company rules in their returns.

These changes are seen as strengthening the existing legislation and bringing the UK into line with modern practice in other countries as well as contributing to the drive against tax avoidance and advisers had been braced for further tightening of the laws surrounding controlled foreign companies, or companies in tax havens.

The proposals announced yesterday are:

Arrangements by finance lessors to accelerate capital allowances and to transfer unused allowances will be stopped. The use of group relief will also be stopped - and, says the Treasury, this will "level up the playing field between leasing and direct purchase".

All dividends on shares that are trading assets will be taxed as trading income. This ends the "unjustifiable distinction for tax purposes between dividends and other forms of income from trading assets" and will end certain financing schemes being promoted by a number of merchant banks.

A measure to stop avoidance schemes designed to get around the rules on company purchase and abandonment.

Measures to stop the sale of tax liabilities originally introduced in 1994 have also been strengthened.

Paul Wopshott, tax partner with accountants Price Waterhouse, said: "In opposition, Labour had urged that various tax `loopholes' be blocked. The Chancellor has announced a review of the desirability of a general anti-avoidance provision and has acted to block some specific schemes immediately.

"Targeted legislation always puts the Revenue in the position of trying to catch up, whereas general legislation may be seen as more satisfactory from the Government's point of view. To provide certainty to taxpayers, however, any such legislation should be combined with an advance clearance mechanism, which would require extra resources at the Revenue."

On the introduction of a general anti-avoidance principle, as exists in most European countries as well as Australia, one tax adviser said: "Tax planning may still be possible but greater care will be needed to stay the right side of the law."