Partner Article

Chief Secretary announces Government action on tax avoidance

In an announcement on 18 September, the Right Honourable Danny Alexander MP stated that “HM Revenue & Customs has evidence that the [tax] rules are being exploited in two areas. In the first, partnerships pay companies for services at cost price and use the tax rules to create a mark-up which is not actually paid, but which reduces the bill for the individual partners”.

The next day, a brief technical summary was published in which, adopting a tone of surprised indignation, HMRC reported that it had “become aware of two main arrangements that exploit the rules in order to generate the tax advantage”.

We’ll have a look at the nature of the supposed ‘schemes’ in a moment. However, it is important to be clear that the Government and HMRC’s posture of shock at recently discovered tax avoidance is as contrived as some of the artificial avoidance about which we have expressed concerns in Weekly Tax Brief.

Adopting an artificially contrived position to justify a challenge to established tax law does no credit to the Government or to anyone in HMRC who is genuinely interested in establishing a stable and robust tax system with clear and certain outcomes.

So what’s this all about? UK transfer pricing legislation concerns the prices charged in transactions between connected parties as, in such circumstances, the price charged may not necessarily be that which would have been charged if the parties had not been connected.

The rules are mainly designed to ensure that the right prices are charged for goods and services between connected parties on international transactions. However, the same rules also apply within the UK, where, if they adjust prices to increase one side’s profit, a claim can be made to reflect the same price for the other side.

Prior to 2004, the UK transfer pricing rules did not apply to domestic transactions. In the early years of the last decade, various aspects of UK law (and especially UK tax law) were being successfully challenged in the European courts on the basis that they did not comply with EU non-discrimination requirements.

Fearing a challenge to its transfer pricing legislation, the UK Treasury had two choices: exclude transactions with EU companies from the rules too (so ensuring that UK and European companies were treated in the same way) or bring UK businesses within their scope. Unsurprisingly, it decided to do the latter.

As a result, since 2004 tax inspectors have been agreeing – under the terms set down in statute and knowing all the facts – the transfer pricing adjustments to be made on transactions between UK businesses. These businesses include partnerships and the service companies which employ their people.

The UK domestic transfer pricing rules will now be changed. However, as HMRC has been applying the current law vigorously for the better part of a decade, in full knowledge of the consequences of doing so, it’s a bit rich for the Government to turn round and feign surprise, as if a new tax scheme has suddenly come to light.

It would be far more honest to recognise that this is yet another area in which Parliament, through a series of legislative steps, has got to exactly the wrong place but for all the right reasons. Regular readers of Weekly Tax Brief will know that this is not the first such example. Nor, we are sure, will it prove to be the last.

This was posted in Bdaily's Members' News section by Baker Tilly .