As announced in last year's Autumn Budget, HMRC is consulting until 8 June 2018 on proposals to tackle avoidance schemes that aim to move offshore profits of trades or professions considered to be properly attributable to the UK.
The arrangements targeted are those where the profits arise in substance from a single activity carried on in the UK but which, for tax purposes, are treated as arising in one or more other low or no tax jurisdictions. While recognising that anti-avoidance legislation already exists that should counter any claimed tax benefits – such as the transfer pricing rules, diverted profits tax and the transfer of assets abroad provisions – HMRC notes that these can be difficult and/or slow to enforce if the necessary information isn't provided to HMRC, and do not all apply to individuals and SMEs in any case.
Scope of the charge
The types of arrangements that HMRC wish to catch are:
(a) where part of the receipts for services provided in the UK are paid to an offshore entity on the basis that it is providing consultancy services, even though it has no assets apart from access to the skills and services of the UK individual; or
(b) where the UK individual or SME pays excessive expenses to an offshore entity to reduced UK profits,
and the UK individual or entity has use of the money paid to the offshore entity, e.g. by way of loans or trusts.
Proposed measures
The proposals are intended to take effect from April 2019 and have two main strands:
1. Targeted legislation requiring alienated profits meeting certain conditions to be added to UK profits. The UK resident will be liable to tax:
- on profits attributable to that person or entity's professional or trading skills;
- that end up in an entity where "significantly less tax" is paid (alienated profits);
- where the UK resident (or certain connected persons or persons acting together with them) has "power to enjoy" the economic benefits from the alienated profits; and
- it is reasonable to conclude that at least some of that entity's profit is excessive (having regard to the functions it performs) and that this is attributable to its connection to the UK resident.
2. A new duty to notify HMRC of such schemes and pay tax earlier.
The notification duty would only require the conditions in the first three bullet points above to be met, thus deliberately casting this duty wider than the charging provisions so that it would be HMRC reviewing the facts and deciding whether the entity's profits were excessive and therefore whether to issue a "charging notice"
Comment
While nobody would take issue with HMRC introducing measures to prevent artificial fragmentation of UK profits for tax avoidance purposes, the key question as ever is whether the legislation will be framed in sufficiently narrow terms to prevent genuine commercial arrangements being caught.
There is also the additional compliance burden of considering whether yet another set of anti-avoidance provisions applies and documenting the conclusion accordingly. This will be particularly irritating for larger corporates, for whom these sorts of arrangements are already covered by existing tax legislation.
