House of Commons - Explanatory Note
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Part 12: Tax avoidance

Overview

1796.     This Part contains provisions relating to various types of tax avoidance. The Chapters are arranged as follows:

  • Transactions in securities (Chapter 1);

  • Transfer of assets abroad (Chapter 2);

  • Transactions in land (Chapter 3);

  • Sales of occupation income (Chapter 4);

  • Avoidance involving trading losses (Chapter 5).

Chapter 1: Transactions in securities

Overview

1797.     This Chapter rewrites, for the purposes of income tax, sections 703 to 709 of ICTA.

1798.     Sections 703 to 709 of ICTA were enacted as a wide-ranging anti-avoidance rule which would enable the Crown to counter all manner of devices to avoid income tax involving transactions in shares or other securities or the manipulation of a company's assets or both, and to forestall the creation of such devices in future.

1799.     The clauses of this Chapter are arranged in the following order:

  • Clauses 615 and 616 - introduction (clause 616 defines the central concept of "income tax advantage");

  • Clauses 617 and 618 - definition of the person liable to counteraction of income tax advantages;

  • Clauses 619 to 627 - circumstances in which, if income tax advantages are obtained or obtainable, the Chapter may apply;

  • Clauses 628 to 633 - procedure for counteraction of income tax advantages;

  • Clauses 634 to 636 - clearance procedure and information powers;

  • Clause 637 - how the special tribunal for the purposes of this Chapter is to be constituted;

  • Clauses 638 to 644 - appeals;

  • Clauses 645 and 646 - supplementary.

Clause 615: Overview of Chapter

1800.     This clause provides an overview of the Chapter. It is based on section 703(1) of ICTA.

1801.     Subsection (2) provides a signpost to clause 631, which is concerned with the issue of notices counteracting income tax advantages.

Clause 616: Meaning of "income tax advantage"

1802.     This clause defines "income tax advantage" for the purposes of this Chapter. It is based on section 709(1) and (2A) of ICTA.

1803.     This Bill consequentially amends sections 703 to 709 of ICTA to apply solely for corporation tax purposes. In particular, sections 703 to 709 of ICTA will use the term "corporation tax advantage".

1804.     But the definition of "tax advantage" in section 709(1) of ICTA is used in a large number of other anti-avoidance provisions (such as paragraph 13 of Schedule 9 to FA 1996 (loan relationships: unallowable purposes test)). To ensure that these provisions are not disturbed, this Bill inserts a new section 840ZA of ICTA (meaning of "tax advantage"), and consequentially amends those provisions outside Chapter 1 of Part 17 of ICTA which use the section 709(1) definition of "tax advantage".

Clause 617: Person liable to counteraction of income tax advantage

1805.     This clause defines the person liable to counteraction. It is based on section 703(1) and (2) of ICTA.

1806.     Subsection (1) sets three positive conditions for this clause to apply to a person in respect of a transaction in securities or two or more such transactions.

1807.     The first condition, in the full-out words at the beginning of subsection (1), is that the person is in a position to obtain or has obtained an income tax advantage.

1808.     The second condition, in subsection (1)(a), is that the person is in a position to obtain or has obtained the income tax advantage in circumstances where any of the "specified provisions" applies in relation to the person.

1809.     The third condition, in subsection (1)(b), is that the person is in a position to obtain or has obtained the income tax advantage in consequence of either the transaction or the combined effect of the transactions.

1810.     Subsection (3) covers the situation when an income tax advantage is obtained or obtainable by a person in consequence of the combined effect of the transaction or transactions and the liquidation of a company.

Clause 618: Exception where no tax avoidance object shown

1811.     This clause provides an exception to clause 587 in certain circumstances. It is based on the "escape clause" in section 703(1) of ICTA.

1812.     Subsection (1) provides that a person is taken out of clause 617 if that person shows that both conditions A and B are met. These conditions are defined in subsections (2) and (3).

1813.     Section 703(1) contains a reference to "the transaction or transactions being carried out". In Greenberg v CIR (1971), 47 TC 240 HL (on pages 279 and 283) Lord Guest and Lord Simon of Glaisdale said that "carried out" in section 703(1) of ICTA meant "effected" as in section 707 of ICTA rather than "implemented". Clauses 618(2) and 634 (which is based on section 707) therefore both refer to transactions being "effected". This is a verbal change to provide consistency. It does not change the law.

Clause 619: Abnormal dividends used for exemptions or reliefs (circumstance A)

1814.     This clause is the first in a sequence of clauses in which the sets of circumstances in section 704 of ICTA are laid out and expanded in five separate clauses. It is based on section 704 A and 709(3) of ICTA.

1815.     The sequence also includes four interpretative clauses based on sections 704 D and 709 of ICTA. The approach here takes account of the comments of Slade J in CIR v Garvin (1981), 55 TC 24 1 on page 50:

1 [1981] STC 344.

The five circumstances set out in [what is now section 704 of ICTA] are set out in minute detail, not for the assistance of the Crown but for the protection of the subject, in the context of a preceding section of a penal nature.

1816.     Subsection (1) requires that three conditions set out in subsections (2) to (4) must be satisfied if clause 619 is to apply to a person.

1817.     Subsection (3) lays down what the receipt must be in connection with. The approach taken here differs from that in the source legislation. First, the subsection brings together provisions that were previously drafted in separate subsections. Second, in line with judicial comment on these provisions, it does not treat section 709(3)(a) and (b) as non-exhaustive definitions. The approach taken here is consistent with the case law on these provisions: CIR v Parker (1966) 43 TC 396 HL, CIR v Cleary (1967) 44 TC 399 HL, Hague v CIR (1968) 44 TC 619 CA, CIR v Horrocks (1968) 44 TC 645 Ch D and CIR v Wiggins (1978) 53 TC 639 Ch D 2.

2 [1979] STC 244.

1818.     Subsection (4) prescribes the tax purposes for which the amount received must be taken into account.

Clause 620: Deductions from profits obtained following distribution or dealings (circumstance B)

1819.     This clause is based on sections 704 B(1) and 709(3)of ICTA.

1820.     Subsection (1) requires that three conditions set out in subsections (2) to (4) must be satisfied if clause 620 is to apply to a person.

1821.     Subsection (2) provides that the person must become entitled to a deduction in calculating profits or gains in respect of securities.

1822.     Subsection (3) prescribes what the person's entitlement must arise in connection with. See also the commentary on clause 619(3).

1823.     This clause does not rewrite section 704 B(2), which is corporation tax specific.

Clause 621: Receipt of consideration representing company's assets, future receipts or trading stock (circumstance C)

1824.     This clause is based on sections 704B, 704 C and 709 of ICTA.

1825.     Subsection (1) requires that three conditions set out in subsections (2), (3) and (6) must be satisfied if clause 621 is to apply to a person (A).

1826.     Subsection (2) is about the receipt of consideration. It prescribes what the consideration must be if clause 621 is to apply to A.

1827.     Subsection (3) requires that, if clause 621 is to apply to a receipt, it must be in consequence of a transaction whereby another person (B) - to summarise - either receives an abnormal amount by way of dividend or becomes entitled to a deduction in calculating profits or gains in respect of B's securities. Subsection (3) retains the source legislation's connective "whereby", which has been the subject of judicial comment.

1828.     Subsection (4) prescribes what B's entitlement (in subsection (3)) must arise in connection with. On the rewrite of section 709(3)(a) and (b) in this context, see the comment on clause 619(3).

1829.     Section 709(3)(c) of ICTA (meaning of "consideration") is rewritten for the purposes of clause 621 in subsection (8). Subsection (8) extends "consideration" to include non-contractual receipts of money or money's worth.

Clause 622: Receipt of consideration in connection with relevant company distribution (circumstance D)

1830.     This clause is based on sections 704(C), 704 D and 709 of ICTA.

1831.     Subsection (1) requires that three conditions set out in subsections (2) to (4) must be satisfied if clause 622 is to apply to a person.

1832.     Subsection (2) is concerned with the receipt of consideration. It prescribes what the receipt must be in connection with if clause 622 is to apply to the person in question. It is based on sections 704 D(1) and 709(3)(a) and (b) of ICTA.

1833.     On the rewrite of section 709(3)(a) and (b) in this context, see the comment on clause 619(3).

1834.     Subsection (6) is concerned with "consideration". It is based on section 709(3)(c) of ICTA. It extends "consideration" to include non-contractual receipts of money or money's worth.

Clause 623: Receipt of assets of relevant company (circumstance E)

1835.     This clause is based on section 704 E and 709(3) of ICTA.

1836.     Subsection (1) requires that four conditions set out in subsections (2) to (4) and (7) must be satisfied if clause 623 is to apply to a person.

1837.     Subsection (8) defines "security" and (non-exhaustively) "consideration" and "share" in clause 623. It extends "consideration" to include non-contractual receipts of money or money's worth.

Clause 624: Meaning of "relevant company" in sections 622 and 623

1838.     This clause defines the term "relevant company", which is used in clauses 622 and 623. It is based on section 704 D of ICTA.

Clause 625: Abnormal dividends: general

1839.     This clause is the first of three interpretative clauses about abnormal dividends. It is based on section 709(4) of ICTA.

1840.     Subsection (1) provides that a dividend is abnormal if "the appropriate authority" is satisfied either that "the excessive return condition" is met or that "the excessive accrual condition" is met. Signposts are provided to clauses 626 and 627, where these conditions are defined.

1841.     Subsection (2) defines "the appropriate authority". It replaces the reference to "the Board" with a reference to "an officer of Revenue and Customs" (namely, the officer dealing with the case). See Change 5 in Annex 1.

1842.     HMRC's internal procedures restrict the exercise of the Commissioners for Revenue and Customs' functions under Chapter 1 of Part 17 of ICTA to a small group of specialist officers. Change 5 will have no effect on this practice.

Clause 626: Abnormal dividends: the excessive return condition

1843.     This clause defines the excessive return condition. It is based on section 709(4) and (6) of ICTA.

Clause 627: Abnormal dividends: the excessive accrual condition

1844.     This clause defines the excessive accrual condition. It is based on section 709(4) and (5) of ICTA.

Clause 628: Preliminary notification that section 617 may apply

1845.     This clause is concerned with preliminary notification that clause 617 (person liable to counteraction of income tax advantages) may apply. It is based on section 703(3) and (9) of ICTA.

1846.     The. clause is the first of a group of clauses (Clauses 628 to 633) which lay down the procedure for counteraction of income tax advantages.

1847.     As explained in the note on clause 625, clause 628 similarly replaces a reference to "the Board" with a reference to "an officer of Revenue and Customs" (namely, the officer dealing with the case). See Change 5 in Annex 1.

Clause 629: Opposed notifications: statutory declarations

1848.     This clause applies if the person on whom the preliminary notification is served considers that clause 617 does not apply. It is based on section 703(9) and (10) of ICTA.

1849.     As explained in the note on clause 625, this clause similarly replaces references to "the Board" with references to "an officer of Revenue and Customs" (namely, the officer dealing with the case). See Change 5 in Annex 1.

1850.     Subsections (1) and (2) are about the person's right to make a statutory declaration that clause 617 does not apply and the time limit for doing so.

1851.     Subsection (3) lays down the legal consequences if the person makes a statutory declaration, sends it to the officer and the officer sees no reason to take further action.

Clause 630: Opposed notifications: determinations by tribunal

1852.     This clause applies if the officer receiving a statutory declaration sees reason to take further action. It is based on section 703(10) of ICTA.

1853.     As explained in the note on clause 625, clause 630 similarly replaces references to "the Board" with references to "an officer of Revenue and Customs" (namely, the officer dealing with the case). See Change 5 in Annex 1.

1854.     Subsections (2) and (3) are about what the officer must and may do.

1855.     If the taxpayer gives a statutory declaration that clause 617 does not apply and the officer sees reason to take further action, subsection (2) requires the officer to send the tribunal a certificate to that effect, together with the statutory declaration.

1856.     Subsection (4) is about what the tribunal must do.

1857.     Subsection (5) lays down the legal consequences if the tribunal determines that there is no case for the officer to take further action.

1858.     Subsection (6) limits those consequences to cases where the transaction or transactions under review are the only ones involved.

Clause 631: Counteraction notices

1859.     This clause is concerned with notices for the counteraction of income tax advantages. It is based on section 703(3), (9), (10) and (12) of ICTA.

1860.     As explained in the note on clause 625, clause 631 similarly replaces references to "the Board" with references to "an officer of Revenue and Customs" (namely, the officer dealing with the case). See Change 5 in Annex 1.

1861.     Subsection (1) lays down that the officer can serve a counteraction notice in two circumstances, namely if:

  • the person on whom a preliminary notification has been served has not exercised the right to make a statutory declaration in the time allowed; or

  • the person has exercised this right, but the tribunal has determined that there is a prima facie case for counteraction.

1862.     Subsection (1), unlike the source legislation, makes it explicit that counteraction can proceed once the tribunal has determined that there appears to be a case for counteraction. This follows a dictum to that effect from Oliver J in Balen v CIR (1978) 52 TC 406 3 on page 408.

3 [1978] STC 420.

1863.     Subsection (4) specifies the kinds of adjustment which a notice may require to be made, including an assessment.

Clause 632: Limit on amount assessed in section 622 and 623 cases

1864.     This clause sets a limit on the amount assessed in cases within clauses 622 and 623. It is based on section 703(3A) of ICTA.

Clause 633: Timing of assessments in section 623 cases

1865.     This clause is a special rule for the timing of assessments in clause 623 cases. It is based on section 704 E(2) and (3) of ICTA.

Clause 634: Application for clearance of transactions

1866.     This clause is concerned with applications for clearance of transactions. It is based on section 707(1) of ICTA.

1867.     This clause will apply solely for income tax purposes, and section 707 of ICTA will apply solely for corporation tax purposes. HMRC's operational guidance will tell officers what action they should take if a clearance application is made which appears to refer to the wrong provision.

Clause 635: Effect of clearance notification under section 634

1868.     This clause lays down the legal consequences of HMRC giving a clearance notification under clause 634. It is based on section 707 of ICTA.

1869.     This clause will apply solely for income tax purposes, and section 707 of ICTA will apply solely for corporation tax purposes. If HMRC issue a clause 635 or section 707 clearance which refers by mistake to the wrong provision, HMRC will treat it as if it referred to the correct provision.

Clause 636: Power to obtain information

1870.     This clause gives HMRC power to obtain information relevant to this Chapter. It is based on section 708 of ICTA.

1871.     Clause 636 changes the 28-day information gathering time limit to 30 days. See Change 101 in Annex 1.

1872.     As explained in the note on clause 625, clause 636 replaces references to "the Board" with references to "an officer of Revenue and Customs" (namely, the officer dealing with the case). See Change 5 in Annex 1.

1873.     This clause will apply solely for income tax purposes, and section 708 of ICTA will apply solely for corporation tax purposes.

Clause 637: The tribunal

1874.     This clause prescribes how the special tribunal for the purposes of this Chapter is to be constituted. It is based on section 706 of ICTA.

Clause 638: Appeals against counteraction notices

1875.     This clause is concerned with appeals against counteraction notices. It is based on section 705(1) and(5) of ICTA.

1876.     Section 705(5) of ICTA gives the Special Commissioners the power not only to vary or quash an assessment but also, implicitly, to affirm it: see Browne-Wilkinson J in Anysz v CIR (1977), 53 TC 601 ChD on page 630. 4 Subsection (3) makes this implication explicit, and similarly makes it explicit that the Special Commissioners have the power to affirm a counteraction notice.

4 [1978] STC 296 on page 321.

Clause 639: Rehearing by tribunal of appeal against counteraction notice

1877.     This clause is concerned with the tribunal rehearing appeals against counteraction notices. It is based on section 705(2), (3) and(5) of ICTA.

1878.     As explained in the note on clause 625, clause 639 similarly replaces references to "the Board" with a reference to "an officer of Revenue and Customs" (namely, the officer dealing with the case) See Change 5 in Annex 1.

1879.     Section 705(3) of ICTA provides that the tribunal shall "have and exercise" the same "powers and authorities" as the Special Commissioners. In the present context, exercising a power is implicit in having it and it is unnecessary to refer to both "powers" and "authorities". Subsection (4), which is based on this part of section 705(3), therefore merely says that the tribunal have the same powers in relation to the appeal as the Special Commissioners.

Clause 640: Statement of case by tribunal for opinion of High Court or Court of Session

1880.     This clause is concerned with appeals from the tribunal to the High Court (in England and Wales) or the Court of Session (in Scotland). It is based on sections 705(5) and 705A of ICTA.

1881.     As explained in the note on clause 625, clause 640 similarly replaces a reference to "the Board" with a reference to "an officer of Revenue and Customs" (namely, the officer dealing with the case), See Change 5 in Annex 1.

Clause 641: Cases before High Court or Court of Session

1882.     This clause is concerned with cases before the High Court or the Court of Session. It is based on section 705A of ICTA.

Clause 642: Effect of appeals against tribunal's determination under section 639

1883.     This clause sets out the legal consequences if the tribunal have made a determination under clause 639 about an assessment and a case has been required to be stated about it under clause 640 or is pending before the High Court or the Court of Session. It is based on section 705A(10) to (12) of ICTA.

Clause 643: Appeals from High Court or Court of Session

1884.     This clause is concerned with appeals from the High Court and the Court of Session. It is based on section 705A(8), (9) and (12) of ICTA.

1885.     This clause refers to "the Supreme Court" rather than "the House of Lords". This anticipates the substitutions to be made by paragraph 47 of Schedule 9 to the Constitutional Reform Act 2005. This Bill includes a transitional amendment substituting "the House of Lords" for "the Supreme Court" for the period before the paragraph 47 amendments come into force.

Clause 644: Proceedings in Northern Ireland

1886.     This clause deals with proceedings in Northern Ireland. It is based on section 705B of ICTA.

1887.     Section 705B of ICTA (transactions in securities: proceedings in Northern Ireland) applies the procedures of section 705A of ICTA to Northern Irish appeals. In particular, it provides that "the Taxes Acts (as defined in section 118(1) of [TMA])" shall have effect as if section 705A applied with modifications to reflect the court system in Northern Ireland.

1888.     Section 118(1) of TMA defines "the Taxes Acts" as "this Act [ie TMA] and (a) the Tax Acts and (b) the Taxation of Chargeable Gains Act 1992 and all other enactments relating to capital gains tax."

1889.     The implicit reference to the enactments relating to capital gains tax is redundant. This clause therefore omits it.

1890.     This clause refers to "the Supreme Court" rather than "the House of Lords".In this connection see the commentary on clause 643 .

Clause 645: Application of Chapter where individual within section 617 dies

1891.     This clause is concerned with the application of this Chapter where an individual within clause 617 has died. It is based on section 703(11) of ICTA.

1892.     Subsection (3) expressly refers not only to the making of a statutory declaration, rights of appeal and the giving of information (like the source legislation) but also to notices and notifications such as are mentioned in subsection (2). This reference is implicit in section 703(11).

Clause 646: Interpretation of Chapter

1893.     This clause is interpretative. It is based on section 709(2) of ICTA.

1894.     In CIR v Joiner (1975), 50 TC 449 HL 5 Lord Diplock said (on page 487):

5 [1975] STC 657.

In the instant case the explanation in [what is now section 709(2) of ICTA] of the expression "transaction in securities", though introduced by the word "includes", speaks of "transactions, of whatever description, relating to securities" as well as referring to particular examples of such transactions. This is so extensive as to leave no possibility of there being any transaction which could sensibly be described as a "transaction in securities" without also falling within the longer description in the interpretation clause. So it is no more than a direction to the reader: "Whenever you see the words "transaction in securities" in this Chapter of the Statute you must treat them as being shorthand for the whole of the words in [what is now section 709(2)] that are preceded by the verb "includes" [in the fourth place in which it occurs]."

1895.     Buckley J and Lord Simon of Glaisdale had made the same point in Greenberg v CIR: (1971), 47 TC 240 on pages 260 and 282.

1896.     This clause therefore expressly rewrites the definition of "transaction in securities" as exhaustive.

 
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