The UK government is set to introduce targeted anti-avoidance rules (TAARs) to the income tax and corporation tax provisions that govern the relationship between rules prohibiting and allowing deductions from profits of a trade or property business.

The TAARs will have effect from 21 December 2012.

The government acted after HMRC became aware of an avoidance scheme that sought to exploit the rules in relation to a property business to generate artificial loss relief for use by companies to reduce their corporation tax profits.

The provisions in sections 31 and 274 of The Income Tax (Trading and Other Income) Act 2005 and sections 51 and 214 of the Corporation Tax Act 2009 govern the relationship between rules prohibiting and allowing deductions. They provide that certain business expenditure incurred by trades and property businesses, that would otherwise be disallowable, can be deducted from business profits.

Legislation will be introduced in Finance Bill 2013 to amend these sections to include a TAAR.

The TAAR will apply where a permissive rule would otherwise allow a deduction in calculating the profits of a trade or property business for an amount which arises from tax avoidance arrangements. It means that the rules prohibiting a deduction take precedence over those allowing a deduction.