UK Budget launches second Offshore Disclosure Facility
The UK government released its 2009 Budget, on 22 April 2009, which contained new anti-avoidance measures, the launch of a second offshore tax amnesty, the introduction of a new top income tax rate and a number of tax measures aimed at businesses and individuals, including details on the implementation of the new foreign profit taxation measures.
The government announced that it intends to step up efforts to fight tax evasion and challenge tax avoidance schemes, saying it expects to raise £1 billion by closing loopholes over the next three years.
The proposed measures include HMRC's publication of the names of deliberate tax defaulters, new reporting requirements for tax defaulters, new duties on senior accounting officers to ensure that corporate tax returns are accurate, an expansion of the Disclosure of Tax Avoidance Schemes regime, and the introduction of a taxation code of practice for the banking sector.
The government also announced it will introduce a targeted anti-avoidance rule to stop the use of schemes that seek to exploit the foreign exchange tax matching rules, introduce legislation targeting avoidance schemes involving financial products, clarify the double taxation rules to counter abusive schemes, introduce legislation to stop the abuse of the manufactured overseas dividend rules, and clarify the intangible fixed assets regime rules by confirming that goodwill is treated as intended.
As previously announced, the government said it was to launch a second Offshore Disclosure Facility (ODF) in the third quarter of 2009. As with the first ODF, introduced in April 2007, UK citizens will have a limited period to come forward and settle undisclosed offshore tax liabilities. Participants will be required to pay back taxes, interest, and a penalty. The government said the penalty regime would be announced before the ODF opens.
The biggest change to personal income taxes was the introduction of a third tax rate, to be levied at 50% on income over £150,000. The new rate will take effect in April 2010. (There are currently two personal income tax rates - the basic 20% rate, which applies to taxable income up to £37,400, and the higher 40% rate, which applies to taxable income over £37,400.)
The government had originally said in the November 2008 pre-Budget report that the new tax rate would be 45% and that it would take effect in April 2011. In his Budget speech, Chancellor of the Exchequer Alistair Darling said he decided to increase the new tax rate and implement it a year earlier "to help pay for additional support for people now".
The government also announced that starting in April 2010, the personal tax allowance would be gradually reduced to nil for those with adjusted net income over £100,000. Also, starting in April 2011, tax relief on pension contributions will be restricted to the basic rate for individuals with an annual income of £150,000 or higher. The government said that in anticipation of this new restriction, it would implement special rules, to apply from 22 April 2009, which will restrict the higher-rate tax relief on pension contributions for individuals.
The foreign profits reform package will take effect this year. Starting 1 July 2009, foreign dividends received by UK companies will be exempt from UK corporate income tax. The exemption will be accompanied by a worldwide debt cap on interest, under which finance expenses payable by UK members of a group of companies will be subject to a cap equal to the consolidated gross finance expense of that group. The debt cap rules will apply to finance expenses payable in accounting periods beginning on or after 1 January 2010.
As part of the reform package, the Treasury Consents rules (which require companies to get approval from HM Treasury before they undertake certain transactions involving subsidiaries that reside outside the UK) will be repealed and replaced by a post-transaction information reporting requirement, which will apply to transactions undertaken on or after 1 July 2009.
Because of the new foreign dividend exemption, the exemption for superior and non-local holding companies and the acceptable distribution policy exemption will be removed from the controlled foreign companies rules. The changes to the CFC regime will take effect for accounting periods starting on or after 1 July 2009, though a two-year transition period will be available for some holding companies.
To spur economic growth and increase the competitiveness of UK businesses, the government also called for an increase in capital allowances for new investment to 40% for one year; the development of a £750 million Strategic Investment Fund to support advanced industrial projects of "strategic importance", of which a third of the funding will be applied to low-carbon projects; and a review of the UK's tax treatment of intellectual property.
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