By Marcus Leach

The Government has announced that it is introducing new legislation, effective immediately, to block a tax avoidance scheme involving Manufactured Overseas Dividends (MODs).

The scheme could have resulted in companies, particularly in the financial sector, offsetting or claiming repayment of UK income tax that had in fact never been paid. This could have led to a significant loss of tax receipts, had the Government not taken action.

The new legislation clarifies the corporation tax treatment of MODs. It has been drawn up to counter the newly disclosed avoidance scheme, in which the recipient of a MOD claims to have received it under deduction of UK income tax and seeks to set this off against a corporation tax liability or have it repaid, despite no UK income tax having been paid. The draft legislation, published today by HMRC, will put beyond doubt that no set-off or repayment of income tax can be made in such cases.

“It is essential that everyone pays the right amount of tax at the right time, in order to both provide funding for public services and maintain fairness for the taxpayer, and the Government is determined to reduce tax avoidance," David Gauke, Exchequer Secretary to the Treasury, said.

"We have acted quickly to prevent the use of this particular scheme and we will not hesitate to close down other schemes representing a significant risk to the Exchequer as we become aware of them.”

As this is an area where there is repeated avoidance, in addition to the new legislation, the Government will conduct a wider review of the tax rules on MODs, following Budget 2012, to simplify the rules and reduce further opportunities for avoidance.

Any changes made following the consultation would not come into effect before 1 April 2013.

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