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Draft legislation issued on anti-avoidance compensating adjustments

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The government has published a technical explanation and draft legislation on reducing avoidance involving ‘compensating adjustments’ in the transfer pricing code, in order to stop people avoiding tax by using rules known as compensating adjustments. The rules, which are designed to avoid double taxation between individuals and connected companies, are increasingly being used by individuals to reduce their income tax bill.

Following a period of informal consultation on the technical detail, the draft legislation, effective from 25 October, has been published for inclusion in Finance Bill 2014 which changes the law to remove this avoidance opportunity.

Writing for Tax Journal, David Harkness, global head of tax at Clifford Chance, welcomed the fact that the government has taken on board one point made in the informal consultation: ‘at least now the proposal has been revised so that the non-deductible interest is going to be treated as a distribution which is fairer than originally planned’. The recent announcement though ‘does herald a tougher stance by the government’, he noted. ‘Policy makers need to keep in mind the goal for the UK to be the most competitive tax system in the G20 – moving the goal posts in inequitable ways is not good for UK PLC.’