Move to close billion-pound tax loophole

Murdoch tactics may be outlawed
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Corporations that avoid paying billions of pounds in tax every year - such as Rupert Murdoch's News International - could be caught out by a new rule being considered by the Inland Revenue.

Instead of being allowed to shift money from company to company and from country to country simply to avoid paying tax, corporations would have to be able to show that the transactions had a valid business purpose.

The proposed anti-avoidance measures, similar to those already in use in countries such as Canada and Australia, come in the wake of revelations, first published in the Independent, of the extensive use of tax avoidance tactics by companies such as News International, Mr Murdoch's UK-based publisher of national newspapers.

News International, which owns four national titles including the Times and the Sun, has earned nearly pounds 1bn in net profits since 1986, but has paid a net tax rate of only 1.2 per cent.

It has made extensive use of intra-company transactions, sometimes involving off-shore subsidiaries, that have had the effect of minimising, completely legally, its tax bill.

The Inland Revenue is looking at requiring UK-domiciled companies to demonstrate that transactions have been made for "business purposes" rather than simply to avoid paying tax. Other tax jurisdictions, including Canada, have succeeded in clamping down on tax avoidance through rigorous application of the business purpose test. The fresh attack on corporate tax avoiders is contained in a little-noticed consultation document published by the Inland Revenue shortly before last month's Budget.

While the paper, for which responses are required by next March, has been generally welcomed by tax advisers as an aid to interpreting Britain's increasingly complicated tax laws, some specialists believe that the idea of pre-transaction rulings - decisions on tax treatment given by the Revenue before transactions are undertaken - is in fact linked with general anti- avoidance measures.

The Revenue says that bringing in pre-transaction rulings would fit in with the introduction of Pay and File and Self-Assessment because they would help taxpayers comply with their obligations, encourage voluntary compliance with tax laws and make the UK more attractive as a location for international business.

But some specialists believe that general anti-avoidance measures might be less than fully effective because of the difficulty of proving the intent of the company involved.

The moves from the Revenue come amid growing signs of a more concerted clampdown on tax avoidance by the authorities. The establishment 18 months ago of the Large Groups Office is helping different branches of the Revenue to co-ordinate their approach. But tax advisers also talk of more aggressive tactics by inspectors who are increasingly being promoted on the strength of their success in investigations.

According to the Revenue's latest annual report, the compliance unit last year recovered a total of pounds 6.1bn - equivalent to 3.5p on the basic rate of income tax.

The Labour Party has also set up a working group looking at corporate taxation. It has promised to ensure that companies pay their fair share of tax.

But Labour will not comment directly on the example of Mr Murdoch's tax avoidance. Alistair Darling, spokesman on City matters, has said: "You must never design a tax system to get at one person. It is a matter of fundamental principle."

According to the Independent's investigation into News International's public accounts, the company earned pounds 979.4m in net profits in the past 10 years, but paid only pounds 11.74m in tax, or 1.2 per cent.

Corporation tax in the UK is set at 33 per cent of profits and most companies pay between 20 and 30 per cent.

In addition to the entirely normal use of tax losses carried forward, News International has also used intra-company lending and borrowing, as well as foreign-exchange transactions, to move profits and losses around the group.

It paid no tax on profits of pounds 779m last year and does not expect to pay any tax for some years to come.