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Anti avoidance - Budget changes

Targeted Transactions in Securities

The Government proposes changes to this legislation by the introduction of a Targeted Anti-Avoidance Rule (TAAR), to stop the potential of income being converted into capital and thus benefit from the lower capital gains tax rates. This will apply to liquidation distributions paid after 5 April 2016, where caught by this rule.

Hybrid Financial Instruments

A hybrid financial instrument is one which allows the payer to deduct an amount as interest, but allows the receipt to be treated as an exempt dividend. A hybrid entity is a partnership which is treated as transparent by one jurisdiction but treated as opaque by another. The effect is that one jurisdiction would apply its tax rules to the partnership as if it were a corporate body, while the other would apply its tax rules to the partners. Permanent establishments can be used in a similar way to generate mismatches or double-deductions.

Legislation, applicable to payments after 2016, will be introduced to neutralise the tax mismatch created by the hybrid arrangement by changing the tax treatment of either the payment or the receipt, depending on the circumstances.

Penalties for Evasion and Unsuccessful Avoidance

A raft of proposed changes and consultations targeting tax abuse, avoidance and evasion have been tabled. Among others, these include: a new a criminal offence for offshore tax evaders; 60% penalties under the General Anti-Abuse Rule (GAAR); detention and seizure powers; a statutory definition of ‘reasonable care’; new penalties for participating in a VAT fraud; and cracking down on the hidden economy.

Specific advice should be obtained before taking action, or refraining from taking action, on any of the subjects covered above. If you would like advice or further information, please speak to your usual Shipleys contact.

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