A new consultation has been opened “Tax avoidance involving profit fragmentation” which sets out proposals to tackle tax avoidance schemes which move UK profits outside the UK tax charge.
Large corporate structures have been regulated in respect of the movement of profits out of the UK tax net for many years via the Controlled Foreign Companies (CFC) regime, transfer pricing rules and more recently the Diverted profits tax. There has not however been a corresponding set of regulations in respect of unincorporated businesses and partnerships and SME’s.
A UK resident (individual or company) is taxable in the UK:
- On the full amount of profits from any trade or profession that they carry on, individually or with others
- Whether carried on in the UK or overseas.
- It is normally clear where profit-generating activity takes place and so where profits should be taxed.
HMRC has stated that they are aware of arrangements, which often involve offshore trusts and companies, that are designed to ensure that profits attributable to the earning capacity of a UK resident are fragmented such that they accrue for tax purposes in territories with low tax rates or where there is no tax at all.
The government therefore announced at Autumn Budget 2017 that it would consult on proposals to stop such arrangements. The proposed changes would take effect from April 2019.
The proposals are:
Option 1: Targeted new legislation
Which would affect arrangements where:
- There are profits attributable to the professional or trading skills of a UK resident individual (A), whether A is trading as an individual or a partner, or conducting business through a company (C);
- Some or all of those profits (“alienated profits”) end up in an entity Z which results in significantly less tax being paid on them than would have been paid had they arisen to A and
- A, or a connected person, or someone acting together with A, is able to enjoy economic benefits from the alienated profits.
By including the alienated profits in the UK profits of A or C. The normal domicile status rules would then apply. The proposal is that the trigger for “significantly less tax” should be a tax rate in the region of 80% of the UK tax that would have been paid on the same profits.
Option 2: Notification schemes and payment of tax
This would be intended to remove any cashflow advantages of such profit fragmentations arrangements by:
- Requirement to notify HMRC of the arrangements (as an addition to any existing requirements under DOTAS)
- Issuing a charging notice stating that payment of the amount shown in that notice will be required within a fixed period, for example 30 days.
HMRC has given the following example of a situation which would not be caught by the proposed new rules:
"A UK resident media consultancy company is run by an individual who lives in, and is resident in, the UK and has offices in London and three other European capitals. Each of those offices has its own staff who deal with local customers. Two of the three European territories charge tax on profits at a rate not significantly less than the UK rate, so there is no need to consider the final condition. As for the third, the profit allocated there reflects the substance and there is no reason to believe that any of it relates to the connection between the individual and the overseas offices. Under the new rules the profits would be accepted as arising to those overseas businesses, for the purposes of this legislation."
The new rules would included provisions to avoid double taxation and give priority to exisiting anti-avoidance legislation.
Comments and responses to the following questions are invited by 8 June 2018 to
Consultation questions:
1. The government would welcome any evidence and information about these and similar arrangements to assist it in designing legislation that is properly targeted and does not bear inappropriately on businesses that pay all the taxes due in the UK.
2. The government would welcome comments on whether any additional conditions are required to ensure that the approach set out above is effective and robust.
3. Will the proposed conditions allow most businesses to decide quickly and simply whether or not they are caught by the legislation?
4. Will this test of a lower rate of tax be effective?
5. Are there any alternatives which should be considered?
6. The government would welcome views on any genuine activities carried on in low tax territories which might require special consideration.
7. Any comments on the excessive profits test would be welcome.
8. Is the use of “power to enjoy” as a test the best way of addressing these schemes?
9. Will the “power to enjoy” rules catch all likely targets?
10. Will they risk bringing in arrangements where no tax avoidance is involved?
11. The government would welcome comments as to whether this connection test is appropriate.
12. Will this connection rule bring in any arrangements where avoidance is not involved?
13. Do you have any other comments on this proposed rule?
14. What potential double taxation should be taken into account in the legislation?
15. Any comments on interaction with other anti-avoidance legislation would be welcome.
16. The government would welcome comments on the features which should be included in the notification requirements.
17. The government would welcome comments on these proposals for payment of tax for users of these arrangements.
18. Are there any conditions in particular which might impose onerous reporting burdens on companies not involved in avoidance?
19. Views would be welcome on whether there are alternative approaches to preventing the avoidance without affecting genuine commercial arrangements.
20. Are there any other considerations that the government should take into account when considering the design of this legislation?
21. Do you have any comments on the assessment of equality and other impacts?
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Tax avoidance involving profit fragmentation
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