The measure

The Financial Secretary to the Treasury announced in a written ministerial statement dated 21 October 2009 that legislation will be introduced in the forthcoming Finance Bill to block certain avoidance schemes that have been notified to HMRC.

Under these schemes, companies have used manufactured overseas dividends (MODs) instead of real overseas dividends in order to disapply the anti-avoidance rules in the double tax relief (DTR) legislation. The current MOD rules and regulations aim to give the recipient of a MOD (or any payment deemed to be a MOD) the same relief for foreign tax as the recipient of the real dividend.

Section 804ZA ICTA reduces or eliminates claims to DTR where there is an avoidance scheme or arrangement. The scheme must fall within one of the prescribed schemes in Schedule 28AB ICTA. Paragraph 3 of Schedule 28AB ICTA prescribes a scheme where the person claiming credit for foreign tax has not suffered the full economic cost of the foreign tax for which it is claiming relief. However, it does not work effectively where the claim is for foreign tax which tax law treats as having been paid, for example the MOD rules.

The new measure will amend Schedule 28AB ICTA so that it applies to deemed overseas tax deducted from MODs in the same way that it applies to real overseas dividends. The amendment will ensure that the provision can also apply in other circumstances where the UK Tax Acts deem income to be received under deduction of overseas tax. These changes will prevent credits for notional overseas tax from being treated more favourably than tax credits on real dividends.

This will not result in section 804ZA ICTA applying automatically to deny DTR in relation to deemed overseas tax, since it will still be necessary for that tax to arise as part of a scheme or arrangement one of the main purposes of which is to cause that tax to be taken into account for DTR purposes.

Who will be affected?

This measure will affect relatively few corporation taxpayers; predominantly banks and securities dealers who deal in overseas securities and claim DTR in respect of manufactured overseas dividends.

When?

The legislation will have effect in relation to amounts treated as if they were foreign tax payable on or after 21 October 2009.