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					                    Tax Law Rewrite
                 Response to Paper
                        CC/SC (08) 01

                         Tax arbitrage




This document is available on the internet at:

http://www.hmrc.gov.uk/rewrite




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Tax arbitrage

Introduction
1.     In December 2007 we published Committee Paper CC/SC (08) 01 on the
HMRC internet website www.hmrc.gov.uk/rewrite. The closing date for responses
was 31 March 2008. The draft clauses rewrite the legislation on tax arbitrage.

2.     The purpose of this response document is to provide details of the substantive
technical points made and to explain our analysis and proposals in respect of them.
Minor points, such as suggestions to improve punctuation, are not covered but all
comments received have been carefully considered.

3.      We received written responses from the following:

     • The Chartered Institute of Taxation

     • The Confederation of British Industry

     • The Institute of Chartered Accountants in England and Wales

     • Slaughter and May

4.    The following abbreviations for tax legislation are used in this response
document:

     • F(No.2)A 2005         Finance (No.2) Act 2005

     • ITTOIA                Income Tax (Trading and Other Income) Act 2005

     • ITA                   Income Tax Act 2007

5.     We are grateful for all the comments made, many of which were detailed, and
we appreciate the time and effort that went into them. We are sending each respondent
a copy of this response document.


General comments
      Q1    We welcome comments on the structure of the Chapter.




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       One respondent found the structure logical and clear. One respondent had
       reservations about much of the redrafting, on the ground that the tax arbitrage
       legislation was still new and users had barely had time to absorb it in its
       original form. This respondent considered, nevertheless, that the redrafting for
       the most part improved the clarity of the legislation. One respondent
       considered that the structure was logical and clear to new users of the
       legislation.

6.      We acknowledge that there is a transitional issue for users of the existing
legislation, but we consider that this will be outweighed by the benefits – especially
for new users – of clarifying this complex and important legislation.

7.     We will adopt the proposed structure for the Chapter.


Clause 2: Deduction notices
      Q2      We welcome comments on the proposal in clauses 2, 5, 25 and 26 to
      give officers of Revenue and Customs the function of giving deduction notices
      (Change 601).

       The respondents who commented on this proposal were both content with it.
       One of them made the proviso that this function should not be spread too
       thinly in future.

8.      We will make Change 601 in clauses 2, 5, 25 and 26. We have drawn our
specialist colleagues’ attention to the respondent’s proviso.

       One respondent suggested transposing clause 2(1)(a) and (b) to emphasise
       that the clause only applied to companies within the charge to corporation tax.

9.     We will be happy to adjust the clause.


Clause 8: Shares subject to conversion
      One respondent commented that subsections (5) and (6) defined “the relevant
      time” for the purposes of subsection(1)(a) and (b) although that expression
      only appeared in subsection (4).

10.    In subsections (5) and (6), “For the purposes of subsection (1)(a) /
subsection (1)(b)…” does not actually introduce a definition of an expression used in
subsection (1)(a) or subsection (1)(b). However, as the words under review have
caused difficulty in this context, we will be happy to change them.

11.    We will be happy to adjust the clause.




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Clause 9: Securities subject to conversion
      One respondent commented that subsections (5) and (6) defined “the relevant
      time” for the purposes of subsection(1)(a) and (b) although that expression
      only appeared in subsection (4).

12.    In subsections (5) and (6), “For the purposes of subsection (1)(a) /
subsection (1)(b) …” does not actually introduce a definition of an expression used in
subsection (1)(a) or subsection (1)(b). However, as the words under review have
caused difficulty in this context, we will be happy to change them.

13.    We will be happy to adjust the clause.


Clause 12: Scheme including rights of transfer under a security
      One respondent thought that “at that time” in clause 12(6) could be
      ambiguous.

       One respondent thought that the definition of “relevant benefits” in
       clause 12(7) was over-compressed.

14.    We will be happy to adjust the clause.


Clause 14: The rule against double deduction
      One respondent thought that, on a first reading, subsection 14(1) implied that
      amounts were simply non-deductible.

15.    The respondent appears to have incorrectly assumed, on a first reading, that
“an amount is not allowable” meant that there was an amount which was not
allowable.

16.    We will be happy to adjust the clause.


Clause 15: Application of the rule against deduction for untaxable payments
      One respondent thought that “a transaction forming part of the deduction
      scheme, or a series of such transactions” in clause 15(2) did not rewrite
      section 25(6)(a) of F(No.2)A 2005 accurately.

17.    We will be happy to adjust the clause.


Clause 16: Cases where payee treated as not liable as a result of scheme
      Q3     We welcome comments on the proposal to clarify section 25(8) of
      F(No.2)A 2005 (Change 646).




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         Most of the respondents supported the change in principle. However, several
         of them criticised the wording which had been offered to bring the change
         about. In particular, one respondent commented that (a) the real problem was
         the extent to which, in section 25(6)(c) of F(No.2)A 2005, the phrase “as a
         result of provision made or imposed by the scheme” applied to “the payee is
         not liable to tax” as well as to “his liability to tax is reduced” and (b) this
         problem had been solved in clause 15(4) by moving the phrase forward before
         the paragraphing.

18.    In the light of this respondent’s comments we agree that clause 16(1)(b) is not
needed.

19.    We will omit clause 16(1)(b) and acknowledge Change 646 in the origin note
on clause 15(4).

         One respondent suggested that it might be clearer to retain “of one or more
         person”, as in the source legislation, rather than writing “of another person”.

20.      Section 6(c) of the Interpretation Act 1978 provides:

      “In any Act, unless the contrary intention appears, … words in the singular include the plural and
      words in the plural include the singular.”

21.     We propose to use the expression “of another person” for the sake of
brevity.

         One respondent asked for the draft clauses to reflect the distinction, in
         international tax, between “not liable to tax” (ie in principle exempt from tax)
         and “not subject to tax” (ie in principle not exempt from tax, but entitled to
         certain exemptions).

22.     ITTOIA and ITA adopted the convention that persons were “liable” to tax and
income was “subject” to tax, and Bills 5 and 6 are following this convention. It is
envisaged that the draft clauses on tax arbitrage will be included in Bill 7. It will be
necessary to decide what drafting convention should be adopted in the draft clauses on
tax arbitrage.

23.    We will keep the expressions “liable to tax” and “subject to tax” under
review as work on Bill 7 progresses.

         One respondent criticised the double negative in clause 16(1) and (2).

24.      We will be happy to adjust the clause.




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Clause 19: Receipt notices
      Q4      We welcome comments on the proposal in clauses 19, 22, 25 and 26 to
      give officers of Revenue and Customs the function of giving receipt notices
      (Change 601).

       The respondents who commented on this proposal were both content with it.
       One of them made the proviso that this function should not be spread too
       thinly in future.

25.     We will make Change 601 in clauses 19, 22, 25 and 26. We have drawn our
specialist colleagues’ attention to the respondent’s proviso.

       One respondent suggested transposing clause 19(1)(a) and (b) to emphasise
       that the clause only applied to UK resident companies.

26.    We will be happy to adjust the clause.

       One respondent suggested moving clause 19(2) to clause 22.

27.    We will be happy to make this adjustment.


Clause 20: The receipt scheme conditions
      Two respondents found clause 20(8) unclear.

28.    We will be happy to adjust the clause.


Clause 21: Amounts within corporation tax
      One respondent thought it would be preferable not to use conditions A and B
      in clause 21, because of the possibility of confusion with the lettered
      conditions in clause 20.

29.     The tax arbitrage legislation uses several sets of conditions for various
purposes. To avoid ambiguity, the sets need to be distinguished and the conditions
need to be separately identified. Moreover, the drafting techniques used need to leave
it open for future Finance Acts to insert extra conditions if Parliament so decides.

30.    We will review the drafting techniques used to identify conditions both in
clause 21 and in the Chapter generally.


Clause 27: Amendments, closure notices and discovery assessments where
section 26 applies
       Two respondents noted that clause 27(7) referred incorrectly to subsection (6)
       instead of subsection (2).



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31.   We are grateful for this correction.

32.   We will be happy to adjust the clause.


Clause 28: Meaning of references to schemes and series of transactions
      One respondent commented that in departing from the wording of the source
      legislation clause 28(2) had changed the sense.

33.   On reflection, we agree.

34.   We will be happy to adjust the clause.




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