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LONDON (Reuters) - Britain is to close a tax loophole used by financial services companies when they lend each other securities, in a reform that will save the taxpayer around 40 million pounds a year, the Treasury said on Thursday.
New laws will be put before parliament next year to ban a form of tax avoidance using Manufactured Overseas Dividends (MODs), payments made during the sale and buyback of stocks or other securities, the Treasury said in a statement.
The payments are intended to compensate the original holder of a security for dividends or interest they have lost while lending out their asset.
After the law is changed, companies will be barred from using MODs they have received to reclaim British income tax or setting if off against a corporation tax liability.
Treasury minister David Gauke said the government would review the wider tax rules surrounding MODs next year because it is an area that has seen repeated tax avoidance.
"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," Gauke said in a statement.
HM Revenue & Customs (HMRC) estimated that the planned reform would raise 40 million pounds per year.
Chancellor George Osborne said in his March Budget that he wanted to raise an extra 1 billion pounds a year by tackling tax avoidance. The coalition government has a five-year plan to eliminate the country's record budget deficit through public spending cuts and tax rises.
Full details of the draft law were posted on the HMRC website, here
Reporting by Peter Griffiths