Government clamps down on firms using £1bn tax-haven loophole

THE GOVERNMENT yesterday announced a crackdown on big businesses that avoid around £1bn a year in tax through their subsidiaries inUK tax havens such as the Channel Islands, the Isle of Man and Gibraltar.

THE GOVERNMENT yesterday announced a crackdown on big businesses that avoid around £1bn a year in tax through their subsidiaries inUK tax havens such as the Channel Islands, the Isle of Man and Gibraltar.

Accountants said most multinational companies, and almost all FTSE 100 firms, would be hit by the changes. The Inland Revenue said financialservices firms, such as banks, accountants and insurance companies, were the most likely to be affected by the new legislation, which was introducedwith immediate effect yesterday.

This is the first time the Government has declared fiscal war on British territories which make a tidy living from the tax-avoidance industry.

A Treasury source said: "This Government has always opposed unfair and artificial tax competition. It is certainly not willing to put up with it in itsown backyard."

According to some estimates, half of the business done by the British tax havens arises from the so-called "designer tax" regimes outlawed byGordon Brown yesterday. But Richard Corkill, the Isle of Man Treasury Minister, said: "Our overall tax receipts will not be significantly affected."

And some accountants said the £1bn estimate was too high. Yet even a smaller boost to the Exchequer will be significant, as corporation taxrevenues amount to just £30bn a year.

The new rules close a loophole in the existing law that allows firms which set up controlled foreign companies (CFCs) - or in other wordssubsidiaries of UK parent firms - in Guernsey, Jersey, the Isle of Man, Gibraltar and Ireland, to pay only 75 per cent of what they would have paid ifthey had been resident in the UK. The new regime could be extended to other tax havens in future.

Yesterday's announcement means the companies will now be required to pay a top-up amount of tax equal to the full amount that would otherwisehave been avoided. The legislation will be formally introduced in next year's finance bill and will apply to CFC accounting periods beginning on orafter today.

The new rules will set aside the existing requirement that a company is only within the CFC rules if it has paid tax at a level less than 75 per cent ofthat which it would have paid if it had been resident in the UK.

A number of countries have introduced regimes which are designed to enable companies to get round CFC rules. These are referred to as "designerrate regimes", as they enable companies to pay just enough tax to sidestep the CFC tax payment.

The regimes often work by allowing companies in effect to choose their rate of tax. Another method, found in Jersey, taxes one sort of income at upto 2 per cent and another at 30 per cent. By adjusting the mix of their income, companies are able to alter their overall rate of tax.

The Chancellor will also pursue unfair tax competition by putting pressure on the relevant authorities to alter rules that allow multinationals to crafttheir own tax regime.

It is not low corporation taxes per se that are the problem, but rather the willingness of tax havens to give certain companies special treatment thatallows them to reduce their UK tax burden.

Governments in the European Union and OECD are currently engaged in a concerted attack on unfair tax competition and money laundering throughtax havens.