The government is fully committed to doing what is necessary to protect the Exchequer and maintain fairness in the tax system. Therefore, the government is announcing today that legislation will be brought forward later in the year which corrects a number of loopholes and omissions.
VAT off-shore looping arrangement
The government is announcing today that secondary legislation will be introduced later in the year to tackle VAT avoidance which takes advantage of a particular type of off-shore looping arrangement, as well as examining further measures to tackle variations of this type of avoidance. By taking this action, the government will maintain fairness in the tax system and will protect up to £100 million of future annual tax revenues. The government is also considering additional measures to protect further tax from being lost on variations of these schemes, which could be adopted extensively across the VAT exempt sectors.
Off-shore looping avoidance
Providers of financial services generally cannot reclaim the VAT they incur on their costs because their services are VAT exempt. An off-shore loop is a cross-border structure that enables these VAT costs to be recovered by routing services primarily carried out in the UK via a body located in a non-VAT territory. Those services are then used to provide insurance and other financial services back into the UK market. This is contrary to the intention of the VAT system and distorts competition to the disadvantage of domestic UK suppliers.
This measure addresses a particular version of off-shore looping which is currently found almost exclusively in the insurance sector and involves looping supplies via non-VAT territories. While this scheme is currently the subject of litigation, the government has decided to legislate to put the issue beyond doubt and prevent any ongoing distortion of competition through use of this scheme.
The government will amend UK law using secondary legislation later in the year. This will reduce the scope of the current VAT relief for exporters of financial services by excluding financial intermediation in supplies made ultimately to UK customers. This will mean that the UK providers of these financial services will no longer be able to gain a VAT advantage by acting as an agent for an overseas associate when the services are in fact being provided to their UK customers. The draft legislation and explanatory note will be published today and will be available on the gov.uk website.
The government is also examining further legislative options for closing other versions of avoidance schemes involving such arrangements. This would ensure that revenue is protected in the future and that the system is fair for all and that those that seek to benefit from this type of arrangement do not get an unfair advantage.
Another variant of off-shore looping, involving the provision of repair services to insurers, was addressed in 2016. Alongside that, the government also considered further action, particularly in respect of the application of the VAT use and enjoyment provisions, but concluded that further change was not merited at that time. However, given the additional risks since identified, the scope of the options now under consideration will be much broader, including the use of measures outside of the UK VAT system altogether. Further details will be set out as part of the normal tax making process.
Interest for late payment and repayment of taxes
Additionally, the government is announcing today that it will introduce retrospective legislation in the Finance Bill 2018-19 to correct omissions from enactments that enable HMRC to charge interest for late payment of taxes and to pay interest on repayments to taxpayers. This legislation will also include interest charged as part of the diverted profits tax regime. By taking this action, the government will guarantee the integrity of the tax base.
The legislation will apply retrospectively to cover all relevant interest charged or applied and will not change either the interest rate or amounts charged or repaid by HMRC to date. The legislation will apply to all taxpayers and any existing or future claim or appeal where these omissions have been identified.
The main taxes affected are corporation tax, stamp duty and stamp duty land tax. Further detail can be found in the accompanying draft clause and explanatory note.
This statement has also been made in the House of Lords: