Our prediction:

No Budget or PBR would be complete without there being some measures to combat avoidance; this year will be no different.  It is expected that matters to be addressed will concentrate (or not) on:

Principles-based taxation: transfer of income streams and disguised interest

Much of the opportunity for 'abusive' tax planning arises from the failure to enact clear legislation to deal with complex commercial structures.  Undoubtedly, the responsibility for this lies with the process of drafting and scrutinising legislation and the failure to properly consider the many representations made by business and the professional bodies.

Two proposals are put forward in an attempt to narrow the scope for avoidance in relation to two specific areas where there has been significant activity over recent years. 

Both of these opportunities arise from the distinction drawn between capital and income and the different tax rates that apply, encouraging the conversion of a right to income into a capital receipt.  In the case of the transfer of an income stream this is achieved by the person entitled to the income selling it for a lump sum.  As regards disguised interest, broadly, the funds are placed in a corporate vehicle and the shares sold at a price reflecting the right to the income being generated in the company.
The consultation process has however highlighted the continuing failure/inability of the process to deal with concerns raised and it is likely that the legislation will need to be amended and supplemented with 'guidance'.

Related companies – small companies’ relief

UK anti-avoidance legislation is often extremely widely drafted and rarely changed even when it is seen to be misdirected, disproportionate or no longer in line with policy.  Such is the case with the rules that prevent businesses being fragmented to take advantage of the lower rate of CT for small companies (profits below £300,000).  The legislation operates to require the rate thresholds to be reduced pro rata to the number of associated companies.

The problem is that the meaning of 'associated company' is too widely drawn.  Any changes that have been made have usually been by way of concession rather than legislation.  After 5 years of lobbying it was finally conceded that the legislation needed to be changed and some tinkering was undertaken last year.  As the House of Lords has held that a number of concessions are ultra vires, extensive consultation has been undertaken to consider how the necessary changes may be effected.

Related companies – CGT groups

Tax legislation often evolves over many years with little thought as to its place in the overall scheme.  Even where issues are identified prior to enactment they are not addressed.  The argument is often that businesses are, if properly advised, able to plan their way around the problem.  As a result it is often necessary to seek advice to ensure that the transaction does not fall foul of a pitfall in the legislation that can be avoided.  The rules relating to groups of companies are extremely complex and it is now difficult to discern the policy rationale for some of the rules.  A consultation process has been underway since last spring to consider whether it is possible to recast the rules.  In the process some specific changes may be made in advance of a wider redrafting of the rules.

Income shifting following Arctic Systems

The issue of income-shifting has proved intractable for HMRC and the Treasury: Their first attempt to frame legislation was produced in the 2007 Pre-Budget Report but proved so ill-conceived and poorly drafted that it was derided as unworkable and was withdrawn for further consideration. It will be interesting to see if the appetite for anti-income-shifting legislation remains when the recession starts to lift. If not, the topic may be allowed to slip quietly off the agenda.