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Last Updated: Wednesday, 6 December 2006, 16:04 GMT
Tightening up on tax advantages
Analysis
By Anne Redston
Fellow of the Chartered Institute of Taxation

Anne Redston
Tax expert Anne Redston

A clear message has emerged from the pre-Budget report.

The chancellor has his sights targeted, possibly as never before, at people looking to avoid tax.

Gordon Brown's thinking is simple. With public finances tight, those who previously avoided tax need to be made to pay up.

This pre-Budget report adds further weapons to the government's anti-avoidance arsenal.

New legislation attacks artificial capital losses and managed service companies, restricts the use of Alternatively Secured Pensions (ASPs) and penalises certain promoters of avoidance schemes.

Capital losses

Making a loss on an investment is not all bad news.

Capital losses can be offset against gains, so reducing your tax bill.

PRE-BUDGET REPORT

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The pre-Budget report has now introduced rules that target capital losses that have been created artificially in order to reduce your tax bill.

However these rules should not apply to the majority of people, as their losses will usually arise from the normal disposal of investments.

Managed service companies

Thousands of people work through their own companies.

They are usually directors of these companies and control the company's assets and finances.

If these companies pay the individual in dividends rather than in salary, they can pay less tax and National Insurance Contributions (NIC).

To prevent this, the government previously introduced anti-avoidance rules known as IR35: if an individual is within these rules then this tax and NIC avoidance does not work.

However, the government has become increasingly concerned that significant numbers of individuals are ignoring the IR35 rules.

The focus of their concern is those individuals who work via pre-packaged company structures, sometimes called Managed Service Companies or Composite companies.

Although in many cases the individual should have paid the higher tax and NICs required by IR35, they often have not.

When the taxman tries to collect the money, the individual has already left the company and the company has no assets.

The government has now announced new legislation that deems all those working within these MSC or composite structures to be employees, so they will have to pay the same NICs and tax as employees.

Many people dislike having to hand over their pension savings to an insurance company when they are 75 in exchange for an annuity

However, those who control and manage their own companies have been clearly told that they are not the target: the old IR35 rules will remain in place as before for these "personal service companies."

Alternatively secured pensions

Many people dislike having to hand over their pension savings to an insurance company when they are 75 in exchange for an annuity.

Under the new pension rules introduced in April 2006, it is possible to avoid taking an annuity by using an Alternatively Secured Pension, or ASP.

ASPs were originally intended for the Plymouth Brethren, a religious group who had principled objections to annuities.

However, they have been more widely used, and the government has been concerned that they were being marketed as a capital protection device rather than as the provider of an income in retirement.

The PBR announces a clamp down: a minimum and maximum rate of income must now be taken once you reach 75.

You cannot just leave the lump sum in the pension fund and take out a couple of quid a year.

In addition, there will be a penal 70% tax charge if any balance remaining on death is passed to anyone other than a dependent, charity, or (in some cases) repaid to the employer.

The good news, however, is that the ASP has not been eliminated, as some had predicted.

Instead it remains for those who want to be able to control their own income in retirement.

Promoting tax avoidance

Since 2004, innovative tax planning has to be reported to Revenue by the person who thinks it up (the "promoter").

And if a tax planning scheme falls within these rules, and you use the scheme, you have to tell HMRC on your tax return.

However, because some promoters have found ways round these rules, the PBR announces new legislation which makes it harder for promoters to avoid telling HMRC.

So if you use one of these innovative tax schemes you are more likely to have to report it to HMRC.

Of course, the quicker HMRC can find out about a new tax avoidance scheme, the quicker it can be stopped: this PBR also includes a list of targeted new legislation, which stops schemes already disclosed by their creators under these rules.

Verdict

One refreshing element in this new swathe of legislation is that the Revenue has said that it is prepared to consult on most of these issues.

This makes it much more likely that the legislation will be appropriate, and will not hit people by mistake.

Overall, though, the pre-Budget report represents a tightening of the UK tax regime.

A light is being shone into the dark recesses of the tax system and the taxman hopes to benefit.




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