Government takes immediate action to close two loopholes
On Monday 27 February the Exchequer Secretary announced in a Parliamentary Written Statement that he was taking action against two schemes involving Debt Buy Backs and Authorised Investment Funds. The changes have immediate effect and some of the debt Buy Back provisions are to be backdated to 1 December 2011.
The measures are discussed below but they also raise two important and more generic issues. The first is when should tax changes be introduced with immediate effect and is it ever legitimate to go further and introduce legislation with retrospective effect. The second is whether the proposed action of the taxpayer, which was a bank, was consistent with the Banking Code of Conduct which the particular Bank in question and all the other major banks signed up to before the end of 2010.
The government set out its new strategic approach to tax avoidance in Tackling Tax Avoidance published on Budget Day 2011. It contained government policy on ad hoc announcements to change the law with immediate effect and the very rare occasions when the change would have retrospective effect.
Government policy is contained in the statement Protocol on unscheduled announcements of changes in tax law which is reproduced in Chapter 4 of the Tackling Tax Avoidance publication. In theory it should be available on both the HM Treasury and HMRC websites (para 4.4 of the report) but it appears not to be at the moment and we have raised this with HMRC.
The Protocol had been the subject of prior consultation to which Tax Faculty responded in TAXREP 10/11.
In general terms changes introduced under the Protocol must be publicly announced with sufficient technical information to be clear what is involved and the law must be changed/enacted in the next available Finance Bill.
The Protocol states that ‘changes to tax legislation where the change takes effect from a date earlier than the date of announcement will be wholly exceptional’ (our emphasis).
The use of the Protocol is being kept under review by the Forum of Tax Professionals and they published their first annual report on this and other matters in December 2011. In their appraisal of the Protocol they stated:
‘Since the final protocol was published at Budget 2011, three unscheduled announcements have been made. One was made on 6 April 2011 to tackle tax avoidance in relation to overseas pensions, another on 12 August 2011 on capital allowance anti-avoidance changes and the final was made on 15 September 2011 to block tax avoidance involving Manufactured Overseas Dividends. These were all aligned with this new Protocol. However, there was no quantification of the risk to the Exchequer which should have been included in the announcement.’
Code of Practice on Taxation for Banks
The Code of Practice (Conduct) was the subject of consultation in 2009 and the final Code is contained in an Appendix to the response document A Code of Practice on Taxation for Banks published in December 2009.
HM Treasury announced in November 2010 that the 15 major UK banks had by that time signed up to the Code.
The Code’s section on Tax Planning states that:
‘The bank should not engage in tax planning other than that which supports genuine commercial activity.
Transactions should not be structured in a way that will have tax results for the bank that are inconsistent with the underlying economic consequences unless there exists specific legislation designed to give that result. In that case, the bank should reasonably believe that the transaction is structured in a way that gives a tax result for the bank which is not contrary to the intentions of Parliament.’
The bank in this particular instance has been revealed as Barclays and they reported the transactions under the DOTAS regime and are of the view that they have also complied with the banking code of practice.
The tax planning involved
The buy back of debt provisions have been the subject of earlier anti-avoidance provisions which were announced in 2009 and enacted the following year. You can read our previous, 2009, posting to our website to find out about those earlier buy back of debt provisions
What is involved in the present case is spelt out in paragraph 14 of Loan relationships deemed releases and debt buybacks which combines the draft legislation, explanatory notes and TIIN (Tax Information and Impact Note).
In very basic terms the bank in question was seeking to buy back its issued debt that was trading at a discount to its issue price. The debt was acquired, at its reduced value, by a company which was unconnected at the time but subsequently became connected. The debts were then to be released by the acquiring company and the anti-avoidance provisions as they then stood would not charge the original company on any of the amount of the original debt that was to be released.
The mischief which is ‘attacked’ under the Authorised Investment Scheme (AIF) provisions is set out in the document Corporate Investors in Authorised Investment Funds – Tax Avoidance . The document contains click-throughs to the amending legislation as well as to the relevant TIIN. In this case the taxpayers sought to create repayable tax credits with distributions received from an AIF where no underlying tax had been paid.