The European Commission has ordered Britain to change laws aimed at stopping the removal of assets overseas to avoid tax.
HM Revenue & Customs aims to defy the order by amending the two laws rather than scrapping them.
The first is designed to prevent UK residents switching assets to an offshore company which receives income or proceeds from a sale outside of income tax and capital gains tax rules.
The other prevents UK residents owning assets via an offshore close company to avoid capital gains tax.
HMRC agrees both laws are drafted in broad terms “aimed at addressing a variety of circumstances that let tax inspectors look through transactions and link them to a UK-resident beneficial owner”, but argues they are “critical” tools in the government’s fight to tackle tax management by wealthy individuals.
However, the commission considers the provisions “disproportionately” contravene EU treaties that guarantee freedom of movement of capital and goods. The British government must amend them or go before the European Court of Justice.
The commission claims reforming the rules will “strike a better balance between protecting tax receipts and allowing individuals to pursue genuine economic activity across borders, in accordance with single market principles.”
HMRC has opened consultation on rewording rather than repealing the laws, and is considering exemptions to the rules and an avoidance test.
Consultation closes on October 22 and the revamped tax laws will be included in the Finance Bill 2013, but backdated to April 6, 2012.
Some financial advisers fear the new rules will make interpretation too complicated for many taxpayers.
Alex Henderson, of PricewaterhouseCoopers said: “Anyone submitting a tax return and who has invested overseas will face questions only someone familiar with international tax law will be able to answer with confidence. Taxpayers would prefer simple tests that do not require significant technical advice.”