If you’re serious about anti-avoidance keep Section 765

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As the Guardian notes this morning:

The government's much-vaunted crackdown on corporate tax avoidance risks being seriously undermined by the repeal of a measure that forces multinational companies to inform HM Revenue & Customs when they move money offshore, tax campaigners warned today.

Unnoticed as part of the budget's tax proposals was a Treasury announcement repealing section 765 of the Corporation Tax Act. In addition to forcing companies to seek permission from the Revenue before moving cash offshore, it allows tax investigators to ask them whether moving money out of the UK is to the Treasury's detriment. It also produces information associated with companies' overseas tax and equity structures.

Section 765 has been cited by Revenue investigators as a vital tool in combating corporate tax avoidance, which costs Britain an estimated £13bn each year. But it has long been targeted for repeal by business and major accountancy practices.

The move is timely, and appropriate. Full marks to Liberal Democrat MP John Pugh who has said:

Section 765 has proved extremely useful in preventing tax avoidance, which [is] why the corporate sector has lobbied incessantly for its repeal. If the finance bill passes in its present form, the government will be surrendering a major weapon in the anti-avoidance arsenal and getting nothing in return. The tax avoidance industry will be partying in the streets.

I suspect that’s true. It could be said that section 765 has a problem inherent in it because it was not designed for the purpose for which it is now used. It is actually legislation dating from the Exchange Control era. But the fact is it works, not least because failure to notify carries criminal sanction.

The replacement proposed has many more problems inherent in it. The biggest is that no transaction for less than £100 million will need reporting. This is absurd. There are quoted companies with valuations of less than that. And an opt out is given if the transaction in shares or securities is considered to be ‘in the ordinary course of trade’ — which should let banks off the hook for everything they do, and they might be the organisations likely to be most targeted by section 765.

Worst of all though, the failure to comply is reduced from carrying criminal sanction to incurring a penalty of £300 and £60 a day thereafter. And that’s for failing to notify a deal of £100 million.

The Treasury don’t see any problem with this, but you can see exactly why John Pugh is right to oppose this. The form of an anti-avoidance provision will remain after abolition of section 765. But it will have been gutted of content. Just the way the Big 4 and the banks want it.

The Tories have, of course, long backed abolition of section 765.

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