Clampdown on tax havens

The government yesterday signalled a crack-down on the use of British dependent territories as tax havens by UK firms.

Chancellor Gordon Brown is seeking to close tax loopholes which cost millions of pounds, and to demonstrate UK backing for international initiatives against what are seen as unfair tax regimes. Among the areas in his sights are Guernsey, the Isle of Man and Gibraltar.

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 its own backyard."

The opening shots in the latest offensive came from the inland revenue, with measures to prevent controlled foreign companies from side-stepping tax legislation by using so-called designer tax rate regimes. This occurs when companies divert income from subsidiaries into offshore centres where they are able to set their own tax rates, provided the amount of tax paid is at least 75% of the bill which would have been owed to the exchequer. Recent legislation allows the UK tax authorities to track this figure.

The changes are being introduced with immediate effect even though the supporting legislation will not be put before parliament until spring's budget.

Though the immediate impact of the clampdown will not have a dramatic effect on the tax take from offshore centres, it is being seen in Whitehall as a prelude to a longer campaign aimed at saving £1bn.

"For the companies concerned [the changes] could potentially have quite a significant effect, but their impact on Gibraltar and I think the other offshore centres will be virtually negligible," said Anthony Fisher, who was finance centre director for the government of Gibraltar before joining Bell Pottinger as an international financial services consultant.

The Isle of Man's minister for the treasury, Richard Corkill, said his government was disappointed but not surprised by the move, but added: "The Isle of Man has very few companies which will be affected by this change and overall tax receipts will not be significantly affected."

It is understood that Mr Brown is impatient with a situation where he has to defend the tax practices of Britain's dependent territories in inter national forums such as the Organisation for Economic Cooperation and Development. But though offshore centre revenues will not be hard hit, the treasury sees the use of designer regimes as a growing problem, especially among firms in the financial sector.

The Isle of Man government clearly believes the chancellor is responding to international pressure.

"Mr Brown has made it clear that he abhors tax avoidance schemes and he is obviously responding to pressures from those involved in the European Union tax code of conduct group and the OECD considerations on harmful tax competition," said Mr Corkill.

Constitutionally, the territories have the right to set their own tax rules, which makes it impossible for Mr Brown to intervene directly.

However, the treasury intends to join forces with the foreign office and the home office to exert concerted pressure on the offshore tax havens to change their ways. "We are not out to get them because they have low tax rates. We are in favour of fair tax competition. What we are after is artificial tax competition," a government source said.