The Transfers of Assets Abroad legislation in and around section 720 Income Tax Act 2007 (probably still better known under its previous incarnation as Section 739 TA 1988) is exceptionally complex, being designed to frustrate plans to avoid income tax by arranging for income to be paid abroad.

In very broad terms, if you make arrangements for income to be received by a company or trust (or indeed anybody) outside the UK, the income arising is automatically treated as yours unless there is no possible way in which you can obtain any benefit from the income. There are also some similar and complementary provisions to enable other people who benefit from the foreign income to be taxed on that income. There is a bona fide commercial exemption if you can prove that the arrangements were made without any tax saving purpose (which you can imagine is a bit difficult).

So if, for example, you make arrangements whereby income flows into a foreign company or trust by way of dividend, licence fees, investment income or maybe from the performance of services, it all remains taxable on you.

For years there has been a view (never publically accepted by HMRC) that these provisions are contrary to EU law because they discriminate between income receivable by non-residents and income receivable by residents. If you did any of these things through a UK company, there would be no transparency and it would be the company which would be taxed on the income.

The argument is pretty clear. If the company is resident the provisions would not apply; they only apply because the company is non-resident. Therefore the legislation discriminates against the non-resident company, and that is contrary to the EC Treaty.

It is therefore interesting to learn that the European Commission has issued a statement saying these provisions are discriminatory and represent a breach of the Freedom of Establishment rule and the Free Movement of Capital rule, going beyond what is reasonably necessary to prevent abuse. The Commission has formally requested the UK to amend the rules to eliminate the unlawful discrimination.

This is a serious blow to the HMRC anti-avoidance machinery, and I cannot see them agreeing to this without a fight – but maybe we will learn about the HMRC response in the Budget on 23 March.  

It is important to appreciate that this development applies only to the EU, and there is no suggestion that there is anything wrong with (or any likely variation in) the provisions as they relate to income arising in jurisdictions outside the EU.