Company bosses will no longer be able to avoid income tax by using share options, after rules on employment-related securities were tightened yesterday.
Options, which give the holder the right to buy shares at an agreed price at a future date, are now to be treated as shares for tax purposes, making them liable to income tax of up to 40 per cent and National Insurance.
The Chancellor backdated the change to 2 December 2004, when the Government made an earlier bid to close the loophole.
Rules governing the disclosure of tax schemes were also widened and made less specific yesterday to give the Inland Revenue a freer hand to clamp down on tax avoidance plans. Previously, disclosure rules were much more focused on financial products, such as loans or derivative contracts, or employment. Now, they are being extended to any scheme that bears certain hallmarks covering the whole of the income, capital gains and corporation tax spectrum.
The Revenue has fretted for some time that it often fails to unearth tax avoidance schemes until it is too late.
Other measures introduced to close tax avoidance loopholes centred on trusts, which are funds administered by trustees on behalf of beneficiaries. Trusts can no longer exploit an earlier move aimed at heading off tax dodging by so-called "bed and breakfasting".
Here investors bought shares that grew in value then sold them to crystallise capital gains tax (CGT) allowances on their profits, before immediately buying back the same position.
An earlier rule change to dilute the effectiveness of this arrangement was exploited by trusts, which turned these "matching rules" on their heads to avoid paying CGT on shares that had risen in value.
They often sold stock before moving offshore, where no CGT is payable, and buying it back within 30 days. In these cases, matching rules will no longer apply and the trust will have to pay CGT on profits from share sales when it moves offshore.
Favourable rules governing the treatment of inheritance tax for certain trusts have also been scrapped.
Certain tax advantages enjoyed by charities have been curtailed in an attempt to overcome misuse of charities' tax-free status.
The Government also moved to clamp down on so-called "carousel fraud", where VAT is avoided by a round of buying and selling of the same, typically electronic, goods across Europe. Here, sellers do not pay VAT, but buyers claim relief.
Chris Maddock, a tax expert with BDO Stoy Hayward, said the changes to the regime now place responsibility for VAT payments on the seller, rather than the buyer, and stipulate which goods it applies to: mobile phones, computer chips and similar electronic items.
Other changes included legislation to enshrine the outcome of a high-profile legal case Marks & Spencer won in December.
The European Courts of Justice agreed the high street retailer could offset overseas losses against profits made at home.
The ruling was expected to open the floodgates of other British firms looking to offset losses made by foreign subsidiaries against UK profits.
However, both the court and now the Government have decided that companies may do so only if all other options have been exhausted.Reuse content