The government is taking action to stop people avoiding tax by using rules known as compensating adjustments.
The rules, which are designed to avoid double taxation between individuals and connected companies, are increasingly being used by individuals to reduce their income tax bill.
HM Revenue & Customs (HMRC) has evidence that the rules are being exploited in two areas. In the first, partnerships pay companies for services at cost price and use the tax rules to create a mark-up which is not actually paid, but which reduces the bill of individual partners.
In the second type of case seen by HMRC, individuals lend money to a company in which they are a shareholder, charging excessive interest payments on which they do not pay full income tax.
The government will change the law to remove this avoidance opportunity, following a period of informal consultation on the technical detail.
Separately, HMRC is to launch a campaign targeting landlords who are failing to pay the tax due on rents they receive on their properties.
HMRC estimates that up to 1.5 million landlords may have underpaid or failed to pay up to £500 million in tax in 2009 to 2010.
The campaign will target all landlords, but will be focussing compliance activity into specific landlord ‘types’, for example, those who own more than one property, specialist landlords who rent to students, people with holiday lets and those who let houses in multiple occupation.
The campaign will give landlords who owe tax the opportunity to come forward voluntarily to put their tax affairs in order. If they do not do this and HMRC finds them first they will face bigger penalties and could face criminal proceedings.
Following the Chief Secretary’s announcement HMRC has published a technical discussion document on the proposals.
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