HMRC has published a response to its consultation ‘Tax Avoidance involving Profit Fragmentation’ together with draft legislation included in the Draft Finance Bill 2019.

The consultation set out proposals to tackle tax avoidance schemes which move UK profits outside the UK tax charge resulting in significantly less tax being paid. The proposals included targeted new legislation, notification schemes and the power to issue charging notices for the early payment of tax.

Whilst respondents to the consultation agreed that this type of arrangement is unacceptable and should be prevented and counteracted:

  • They questioned the need for more legislation suggesting that existing anti-avoidance rules could be used instead such as the Transfer of Assets Abroad legislation, transfer pricing rules and GAAR.
  • They were concerned about the wide scope of the proposed legislation as well as its complexity, especially with respect to the definition of “connected persons” and the notification and early payment rules.
  • They felt that the “significantly less tax” definition of 80% of UK tax was too high (with concerns about whether the test here would be “like for like”) and would catch business activities carried on from low tax territories for non-tax reasons.

In response to this the government:

  • Confirms that like for like comparisons will be made, after applying all existing anti-avoidance rules, for example after making transfer pricing adjustments.
  • Will review the connection test to ensure that it achieves the stated objective and does not draw in arrangements and relationships that should not be affected. 
  • Will consider additional conditions to remove as many taxpayers from the notification obligation as possible but will not exclude any arrangements already notified under DOTAS
  • Is postponing the proposal for an early payment rule.

Following publication of the response there will be a period of further technical consultation on the legislation with changes to come into effect from April 2019. 

The full response document can be found here and the draft Finance Bill here.


Tax Avoidance involving Profit Fragmentation 

Transfer of Assets Abroad

General Anti-Abuse Rule

BEPS and diverted profits tax (for SME owners)

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