On 10 April, HMRC published a consultation on tax avoidance involving profit fragmentation. This follows from the August 2017 Budget announcement on UK traders and professionals that arrange for trading income to be transferred to entities in offshore jurisdictions with no or low tax. The consultation refers specifically to arrangements set up by asset managers amongst others, although it is not focused principally on the asset management business.
The purpose of the overall proposal is to specifically target the sort of profit fragmentation arrangements discussed in it and to remove the perceived cash flow advantages that HMRC consider taxpayers might derive from the arrangement by requiring early notification and, at HMRC’s direction, early tax payment.
The consultation contains two elements, each of which HMRC is seeking comment on with a view to their introduction in 2019.
The first part of the proposal is that UK resident individuals or companies will be liable to tax (as trading income) on profits attributable to UK individuals’ professional or trading skills which are retained in an offshore entity in which “significantly less tax” is paid if:
(a) the UK resident or a connected person (or persons acting together with any of them) has the “power to enjoy” those profits; and
(b) it is reasonable to conclude that at least some of the offshore entity’s profit is excessive and is attributable to its connection to the UK resident individual.
The second part of the proposal would require individuals or companies who entered into relevant arrangements (ignoring the requirement that the offshore entity’s pay is excessive) to notify HMRC, who will then consider the facts and issue a charging notice requiring the tax to be paid within a specified period (e.g. 30 days) if they consider that the entity’s profits are excessive.
The document recognises that many arrangements that would fall within these rules might also be covered by other anti-avoidance rules, such as the disguised remuneration, disguised investment management fee or transfer of assets abroad rules, but say that the complexity of investigating and assessing taxpayers’ arrangements means that timing advantages remain that they want to reduce. This approach to early notification of arrangements to HMRC and possible accelerated tax payments is the same as is used under the diverted profits tax rules and where accelerated payment notices are issued and might be something that becomes a more common feature of antiavoidance legislation.
The new rules would be included in the Finance Bill 2019 to take effect from April 2019. The consultation ends on 8 June 2018.