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Anti-avoidance framework

Regulation

What legislative and regulatory initiatives has the government taken to combat tax avoidance in your jurisdiction?

GAAR Sections 206 to 215 of the Finance Act 2013 introduced a general anti-abuse rule (GAAR) which empowers Her Majesty’s Revenue and Customs (HMRC) to counteract tax advantages which arise from abusive (rather than avoidance) schemes. The GAAR applies to:

  • income tax;
  • corporation tax;
  • capital gains tax; 
  • the diverted profits tax; 
  • petroleum revenue tax;
  • inheritance tax;
  • stamp duty land tax;
  • annual tax on enveloped dwellings; 
  • national insurance contributions; and
  • the apprenticeship levy.

HMRC have also published GAAR guidance, namely Tax avoidance: General Anti-abuse Rule guidance.

Diverted profits tax In 2015 the United Kingdom introduced a diverted profits tax under Part 3 of the Finance Act 2015, in order to deter the diversion of profits from the United Kingdom by taxpayers that either:

  • seek to avoid creating a permanent UK establishment that would bring a foreign entity into the charge of domestic corporation tax; or
  • use arrangements or entities which lack economic substance to exploit tax mismatches, either through expenditure or the diversion of income within the group.

Diverted profits tax is charged at 25% on certain profits arising on or after April 1 2015 or 55% for UK ring-fence oil and gas operations, and 33% in cases where the diverted profits would have been subject to the UK banking surcharge.

HMRC has published guidance on the diverted profits tax to be read alongside the legislation.

Anti-hybrid rules The United Kingdom has introduced anti-hybrid rules in line with Base Erosion and Profit Shifting (BEPS) Action 2, which have been effective since January 2017. The rules apply to arrangements that involve:

  • a hybrid instrument or hybrid entity; and
  • a tax mismatch caused by the hybrid.

The anti-hybrid rules apply to taxpayers that pay corporation tax, including permanent establishments, and disallow a tax deduction that would otherwise arise. They apply where:

  • an entity is directly involved in the hybrid mismatch; and
  • there is an ‘imported mismatch’ – where the UK entity is not involved in the hybrid mismatch but it exists elsewhere in the group, and the UK arrangement is part of the same over-arching arrangement as that of the hybrid mismatch.

The United Kingdom is the first country to implement BEPS Action 2 fully and HMRC has recently published guidance on the new anti-hybrid legislation.

General anti-avoidance rules In addition to the above initiatives, various parts of the UK tax code have targeted anti-avoidance rules preventing taxpayers from being entitled to, for example, deductions for interest in certain situations.

To what extent does your jurisdiction follow the OECD Action Plan on Base Erosion and Profit Shifting?

The United Kingdom closely follows, and is a strong advocate of, the Organisation for Economic Cooperation and Development (OECD) BEPS Project. For example, the United Kingdom has:

  • implemented the recommendations of Action 2, neutralising the effects of hybrid mismatch arrangements with effect from January 1 2017;
  • implemented the recommendations of Action 4, restricting deductions for corporate interest expense with effect from April 1 2017; 
  • legislated to reform its patent box rules to conform with the modified nexus approach with effect from July 1 2016;
  • adopted BEPS Action 2 (anti-hybrid rules) and Actions 8 to 10 (transfer pricing); and
  • signed the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting.

Foreign company rules and mandatory disclosure rules are already under control, as recommended by Actions 3 and 12, respectively.

As a more immediate measure, with effect from April 2019, the government plans to introduce an extension to UK withholding tax in order to cover royalties paid in connection with sales to UK companies to no or low-tax jurisdictions, regardless of where the payer is located. 

The government also has advocated for the standardisation of the transfer pricing documentation requirements in order to reduce the costs and demands of compliance for multinational enterprises.

In 2015 the United Kingdom introduced a diverted profits tax under Part 3 of the Finance Act 2015 (see above).

Is there a legal distinction between aggressive tax planning and tax avoidance?

See above in relation to the distinction between abusive tax schemes and tax avoidance.

Penalties

What penalties are imposed for non-compliance with anti-avoidance provisions?

GAAR Under the GAAR a tax advantage gained from an abusive transaction can be counteracted and a penalty of 60% of the amount of the tax advantage can also be imposed. In addition, taxpayers are obliged to take the GAAR into account when completing a self-assessment return and will be subject to the usual penalties associated with failing to take reasonable care when completing a tax return if they fail to do so.

Further, those who have enabled the abusive transactions (eg, marketing or designing them) can be liable to a fine equal to the fee charged by the enabler.

Diverted profits tax See above for diverted profits tax penalties. Criminal penalties may also be applicable.

Disclosure of tax avoidance schemes rules Promotors and users of arrangements that are subject to the disclosure of tax avoidance schemes rules are liable for civil penalties of between £600 (for failure to notify HMRC of an arrangement within five days of the scheme being made available or implemented and charged per day) and £10,000 (for failure to include a scheme reference number on a relevant tax return).

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