Two-fifths of FTSE hit by 'double-dipping' tax crackdown

As many as 40 companies in the FTSE 100 and scores of overseas investors in the UK will be hit by anti-tax avoidance measures which the Treasury claims are aimed at just a handful of tax schemes.

As many as 40 companies in the FTSE 100 and scores of overseas investors in the UK will be hit by anti-tax avoidance measures which the Treasury claims are aimed at just a handful of tax schemes.

The steps, announced in Wednesday's Budget, were presented as a way to stop multinational companies taking advantage of the tax relief for the same expenditure in more than one country. This so-called "double dipping" is used by companies globally to save billions of pounds in tax.

Under the headline "avoidance through arbitrage", the Chancellor announced that he would introduce a measure "to counter the exploitation by companies of differences within and between tax codes to obtain a UK tax advantage". The change came into effect immediately. The move outlawed a raft of so-called "hybrid" structures, used by multinational companies, which have allowed them to take advantage of favourable tax treatments in different countries.

David Cruickshank, UK managing partner (tax) at Deloitte, said that these hybrids are used by up to 40 of the FTSE 100 companies, scores of other UK companies and many foreign investors in the UK. As the changes take place immediately, they will increase tax bills for companies in this financial year.

The Treasury estimates the changes will bring in £200m of extra tax in the coming financial year and £430m in 2006-07. However, Mr Cruickshank thinks the final figure could be much greater because of the wide use of the tax schemes.

He warned that the move could choke off overseas investment in the UK, as other countries, such as the US and Switzerland, allow similar "double dipping". "It is quite a shift in policy on the tax of UK-based multinationals and will create a lot of nervousness about the competitiveness agenda."

Chris Sanger, tax policy partner at Ernst & Young, agreed, saying that the move would make the UK "a much less attractive place to invest" and was "highly short-termist". He said that while the Treasury might bring in extra money in the next couple of years, it would deter investment and make companies relocate, which would lose far more tax revenue over the longer term.

European countries have been making their tax regimes more attractive to bring in companies - the latest being Germany, which announced last week it was to slash corporate tax rates.

Mr Sanger noted that the move was at odds with the Chancellor's policy document for large business tax, published in July 2001, which said: "To create the best possible environment for investment, the tax system should complement business competitiveness, not stifle it."

The Treasury denied the measure would be far-reaching, claiming it was aimed at 20 or so "contrived and unusual avoidance schemes".