I have previously made reference to the formal request by the EU Commission to the UK to amend the rules on the transfer of assets abroad in Sections 721 and 731 Income Tax Act 2007 and in Section 13 Taxation of Chargeable Gains Act 1992 relating to the attribution of capital gains made by non resident companies. Both these provisions were said to be incompatible with the freedom of establishment and free movement of capital articles in the EC Treaty and last December, the Government announced that they would do something about it. They have now published a consultation document including draft legislation which is intended to be introduced next year - although parts of it may be retrospective to 6 April 2012.
As far as Section 13 is concerned, it is proposed to exclude assets used in a genuine economic activity (which will include furnished holiday lettings outside the UK). They will also introduce a motive test to ensure that any transaction or arrangement where one of the main purposes is the avoidance of tax, will still be within Section 13.
These changes are expected to make Section 13 compatible with the EU requirements and there are likely to be some other less significant changes by the time the new rules are introduced.
As far as Section 721 (and Section 731) ITA 2007 is concerned there will be an exemption for income arising from genuine economic activity - that is to say arms length transactions effected for the purposes of economically significant activities carried on outside the UK. This requires the provision of goods or services on a commercial basis, involving an appropriate number of employees or contractors and there is a long list of factors that HMRC will take into account when deciding whether there is a genuine business being carried on.
No motive test is mentioned as one already exists in connection with these provisions. It certainly looks as if the overall effect of these proposed changes will be comparatively small because anybody satisfying these new tests would almost certainly have been excluded from the transfer of assets abroad provisions anyway on bona fide commercial grounds.
The opportunity will also be taken to remove the provisions relating to UK resident companies (incorporated outside the UK) which are presently, and sometimes unexpectedly, found to be within these anti-avoidance provisions - with seriously unpleasant consequences. This is very welcome as this was a significant and often expensive trap.