The UK government is seeking to block a tax avoidance scheme involving what are known as manufactured overseas dividends, which can allow firms to offset tax bills that had never been paid.

New legislation is to be introduced to outlaw MODs as part of a broader move by the coalition Conservative/Liberal Democrat government to stamp out schemes designed to create artificial losses to reduce tax bills.

The new law will clarify how MODs are treated by corporation tax,  a statement from the government’s HM Treasury department said yesterday. 

“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,” David Gauke, Exchequer Secretary to the Treasury, said in the statement.

Any changes made after a consultation period will not come into effect before 1 April 2013. The legislation will form part of the 2012 Finance Bill.