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Capital Allowances ‘Loophole’ Legislation applies from 12 August 2011

The closure of a capital allowances tax avoidance scheme has been brought forward with the legislation to effect same to be legislated in Finance Bill 2012.

Budget 2011 announced that HMRC were targeting a number of schemes including a scheme which HMRC believe accelerates first-year allowances.

One of the proposed changes was the repeal of the ‘exception for manufacturers and suppliers’ provided by section 230 of the Capital Allowances Act 2001 (“CAA 2001”).

This exception currently disapplies anti-avoidance rules in Chapter 17 of Part 2 to CAA 2001 when certain conditions are met. The consultation document explained that the proposed repeal is because HMRC believe they have evidence that the exception is being used to side step the anti-avoidance rules which undermines the effectiveness of anti-avoidance rules designed to stop tax avoidance through the acceleration or inflation of relief for capital allowances.

The purpose of the consultation is to identify whether the proposed repeal will have any adverse impacts on genuine commercial activities. Subject to the outcome of the consultation the intention had been that the repeal would have effect from April 2012.

However, the Government advise that they have very recently become aware of an avoidance scheme being promoted that seeks to take advantage of the section 230 CAA 2001 exception before it is repealed. The scale of the tax potentially put at risk by the scheme is such that the Government decided to announce the repeal of section 230 CAA 2001, to the extent that it provides an exception from section 217 CAA2001.

Legislation will be included in the next Finance Bill repealing section 230, to the extent that it disapplies section 217, with effect from 12 August 2011. The repeal will have effect in relation to expenditure incurred on or after the beginning of that day. HMRC have also published draft legislation for this repeal.

It has also been announced that should it emerge subsequently that the scheme or similar schemes exploiting the section 230 CAA 2001 exception have been used causing a loss of tax then the Government will consider whether the repeal needs to have effect in relation to a time prior to 12 August.

More information is available at http://www.hmrc.gov.uk/budget-updates/march2011/index.htm#12Aug11