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Government pledges to tackle avoidance through transfer pricing

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Danny Alexander, the chief secretary to the Treasury, has announced that the government is to legislate against tax avoidance by partnerships and individuals in transactions involving compensating adjustments derived from the transfer pricing rules.

HMRC has issued a discussion note on the proposals, which explains that the two main arrangements affected are as follows:

  • service companies owned and employed by professional partnerships, where the partnership chooses not to pay an appropriate fee to the company for providing the service; and
  • excessive leveraging of companies by individuals, typically where individuals are share and loan holders and the loan amounts or interest rates are excessive.

Comments on the proposals are invited as soon as possible.

Responding to the announcement, Tim Hames, director general of the British Private Equity Venture & Capital Association (BVCA), said:  ‘This matter is not a “loophole” as reported in some quarters but a well-established set of rules. These are straightforward commercial transactions – they are not structures designed to enable individuals to avoid tax. It is strange then to hear them entering the public arena in the language of newly discovered tax avoidance. This is party conference politics, pure and simple.

‘The government is of course, entitled to amend or end such arrangements as it wishes,’ Hames added. ‘What it may discover, however, is that this is not a black and white question, but a far more complicated matter with implications that extend well beyond the private equity industry.’