Budget 1999: Tax Avoidance - New measures will help to stamp out serious fraud

ACCOUNTANTS AND other tax experts warmly welcomed the Chancellor's decision not to proceed with a general anti-avoidance rule (GAAR) for corporate direct taxes or a mini-GAAR for VAT on construction services. They had regarded the proposals issued by the Inland Revenue last autumn as likely to be highly disruptive to business.

However, a statement issued by the Inland Revenue and Customs & Excise after the Chancellor sat down announced a package of measures aimed at "securing the tax base" that was expected to yield more than pounds 1bn over three years and protect a further pounds 3bn of future revenues.

In addition, it is intended that next year's Finance Bill will contain measures to modernise the Inland Revenue's powers for the criminal investigation of suspected serious tax fraud. In the meantime, draft clauses will be issued for consultation.

While accountants noted that Mr Brown regarded the GAAR approach as an option for the future if more specific legislation did not deter tax avoidance, they were encouraged by the appearance of two measures aimed at sophisticated large companies.

One stamps out the practice of avoiding capital gains taxation arising from the sale of a subsidiary through paying a dividend, selling the companyto an offshore subsidiary and then making the real "outside sale". This is expected to yield pounds 130m a year.

The other stops companies avoiding UK tax on tax haven income by protecting it through passing a large UK dividend through the controlled foreign company. This is expected to yield between pounds 50m and pounds 100m.

In addition, the Inland Revenue announced its intention to crack down on "one-man companies", or what it calls "personal service provision".

Noting that there has been concern about the hiring of individuals though their own service companies so they can exploit the tax advantages offered by corporates, it says it will be discussing the practical application of such measures with a view to introducing legislation in April 2000.

Nicholas Woolf, tax partner with accountants Arthur Andersen, said that drawing the line between genuine self-employed contractors and those who are employees will be difficult for the Revenue - and that is the likely reason for the consultation.

There was also an attack on the practice designed to avoid the payment of stamp duty. Hitherto, companies have been able to avoid paying stamp duty by travelling abroad, signing the documents and leaving them in the chosen country. Now, interest will arise if the documents are brought back into the country, for example, for a legal case. The Government also announced plans to modernise payments and penalties associated with stamp duty.

Customs & Excise also announced measures that it said would protect pounds 1.5bn of future VAT revenue.

There will also be measures to counter VAT abuse through misuse of the capital goods scheme, timing the submission of returns to exploit the repayment supplement provisions and assigning debts to third parties to reduce the amount of VAT due or claiming too much bad debt relief.

Roger Trapp