On 10 April 2018, HMRC issued a new consultation seeking views on proposals to address tax avoidance involving profit fragmentation.

The target is arrangements involving offshore trusts and companies in low or nil tax jurisdictions that accrue profits attributable to the exploitation of a UK resident individual’s earning capacity (for example, as an entertainer) by arranging for the receipts of that activity to accrue to the overseas entity.

HMRC believes that existing structures may be challenged through existing legislation, for example under the transfer of assets abroad legislation, but it claims that delays by promoters and taxpayers in supplying requested information make it difficult for HMRC to apply existing legislation. 

Consequently, HMRC is proposing:

• that UK resident individuals will be liable to tax on profits attributable to that person’s professional or trading skills which are passed to an entity where “significantly less tax” is paid if the UK resident has “power to enjoy” the economic benefits from the alienated profits and some of the foreign entity’s profits are excessive considering what it does or,

• those who use such arrangements will have to notify HMRC who will then consider the facts of the arrangement in question and if it forms the view that the profits of the foreign entity are “excessive” it will issue a “charging notice” requiring tax to be paid within 30 days.

HMRC is proposing to introduce legislation in the 2018/19 Finance Bill, to take effect from April 2019. If enacted, the legislation will apply to both new and existing arrangements.

A copy of the consultation paper is available to view here.

The consultation period ends on 8 June 2018 and anyone wishing to respond can email their responses to profitfragmentation.mailbox@hmrc.gsi.gov.uk or post them to:

Profit Fragmentation Consultation,

HM Revenue and Customs,

Specialist Policy Team,

Room 3C/04,

100 Parliament Street,

London

SW1A 2BQ