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HMRC consults on reform of important anti-avoidance provisions

HMRC has today launched a consultation on the reform of two anti-avoidance provisions:1) the attribution of gains of an offshore company to UK tax resident members of that company ("Section 13"); HMRC has today launched a consultation on the reform of two anti-avoidance provisions:

1) the attribution of gains of an offshore company to UK tax resident members of that company ("Section 13"); and

2) the transfer of assets abroad rules, which can result in an income tax charge where income-producing assets are transferred offshore ("transfer of assets abroad").

The rules are being changed as a result of the European Commission issuing infraction notices against the UK on the basis that these rules in their current form are disproportionate and incompatible with EU treaty freedoms.

The changes are generally positive.

The consultation can be found here.

Section 13

 This provision taxes UK tax resident individual participators in an offshore company to CGT by reference to gains realised by that offshore company.  There are a number of conditions to be met before the rule applies.   The intention, where the rule applies, is to prevent gains from being rolled up in an offshore company.

In very simple terms, the rule is being changed to ensure that it does not aply where (a)the activity of the offshore company is a genuine economic enterprise, as distinct from a device for the "artificial enclosing of assets within a foreign company wrapper (also known as "enveloping")" or (b) there is no tax avoidance motive in the arrangements. In other words, there will be an objective exclusion and a subjective exclusion; if either applies, section 13 will not apply. There will also be some more minor improvements, generally to the benefit of taxpayers.

So, where the offshore company carries out "economically significant activities" it should not fall foul of section 13.  The draft legislation included in the Consultation goes into more detail and there will be guidance from HMRC,  but in most "genuine" cases, it is to be hoped that it will be clear that the test is met for the exclusion to apply.

There is an elliptical reference to HMRC reviewing its practice of accepting that section 13 cannot apply where a double taxation agreement contains a general provision to the effect that gains can only be taxed in the state of the entity making those gains (see 13(5) of the OECD Model Convention), and contains nothing specific dealing with section 13.  We will see what further developments there are in this area.

The changes proposed are expected to have effect from 6 April 2012 once enacted.  The effect is expected to be tax-saving or tax-neutral for taxpayers, so that the retrospectivity should not be a problem, although there will be an ability of elect out of the change for the current tax year.

Transfer of assets abroad

 These rules charge a UK tax resident individual to income tax where there has been a transfer of assets and as a result income is payable to a person abroad in circumstances where an individual can still enjoy that income or receive a corresponding capital sum or other benefits.  In short: it applies where assets are transferred abroad through a structure aimed at eliminating or minimising UK income tax whilst preserving the economic benefit of the income.

Currently, the rules don't apply (a) if there is no tax avoidance motive or (b) if the transaction is a genuine commercial transaction where a tax avoidance purpose was merely incidental.

The exemptions are proposed to be widened to apply where there is actual and genuine economic activity overseas as a result of the transfer of assets or associated operations - i.e. where the income in question is attributable to "qualifying arm's length transactions".  There would be two limbs, broadly: 1. the income would have to be attributable to a transaction that would be made between unconnected arm's length parties on the same terms, and 2. it must be effected for the purposes of economically significant activities carried on outside the UK.

There  is proposed to be a further exclusion to ensure that companies incorporated outside the UK but UK tax resident (eg because they are centrally managed and controlled in the UK) will not be treated as a "person abroad".

Finally, HMRC point out that some taxpayers have argued that the transfer of assets rules cannot apply where a double taxation agreement is in place which awards taxing rights in respect of the income in question to the offshore jurisdiction.  HMRC say that the Government does not concede that those arguments are valid.  They intend to "put this beyond doubt" by making it clear in the revised rules that what is to be taxed is not the actual income but a separate amount calculated by reference to that income.  If you are having these arguments with HMRC, please get in touch.

The changes are intended to take effect from 6 April 2012 once enacted.

Responses to the Consultation are required to be made by 22 October 2012.  Please do let us know if you have any comments.


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