The Government announced steps to block an avoidance scheme with came into effect from 15 September 2011 and further announced a consultation on wider changes to the manufactured overseas dividends (MODS) tax rules to be launched after Budget 2012.

The Government announcement follows disclosure of a new avoidance scheme in which the recipient of a MOD claims to have received it under deduction of UK income tax, which it then seeks to set off against its corporation tax liability, or to have repaid, although no actual UK income tax has been paid.

Accordingly, draft legislation was published last month which, in the Government's opinion, puts beyond doubt that no set-off or repayment of income tax can be made in such cases. The legislation has immediate effect from 15 September.

The Government also announced that, in view of what they see as repeated avoidance in this area, a consultation will be launched after Budget 2012 on proposals to make wider changes to the tax rules on MODs.

More information on the announcement and draft legislation can be found at http://www.hmrc.gov.uk/budget-updates/march2011/mod-ministerial-stat.pdf and http://www.hmrc.gov.uk/budget-updates/march2011/index.htm#15Sept11