The European Commission formally requested in February 2011 that the UK amend two anti-avoidance measures:
- The transfer of assets abroad legislation (s739 Income & Corporation Taxes Act (ICTA) 1988, now s714 et seq
Income Tax Act (ITA) 2007)
- The attribution of gains to members of non-UK resident companies legislation (s13 Taxation of Chargeable Gains Act (TCGA) 1992).
The EC views these measures as being
…disproportionate, in the sense that they go beyond what is reasonably necessary in order to prevent abuse of tax avoidance.
The UK government has two months to make a satisfactory response, failing which the EC could refer the UK to the European Court of Justice (ECJ). If referred to the ECJ, the case may take a number of years to be heard. It is also possible the UK government may take pre-emptive action to avoid a referral.
These provisions are a key part of anti-avoidance legislation in the UK and any change could have a profound impact on the structure of UK tax legislation and how individuals operate their businesses and hold their investments.
It is s720 and s13 which largely reduce the opportunity for taxpayers to shelter their income and gains from tax by the simple expedient of holding them via an offshore structure. The provisions (when they apply) pierce the veil of the offshore structures and essentially make the profits taxable in the UK.
The EC believes discrimination exists because if the individual had invested assets in a UK company (rather than a company within the EU), the individual would not be subject to tax—only the UK company would be taxed on its income. The EC’s alert implies that the Commission is only interested in a transfer of assets to a foreign company; however the rules go further than this because they apply to transfers to any foreign persons. It is unclear whether the action will be taken against the rules in their totality or only on transfers to a non-UK but EU resident company.
Individuals and family offices may want to monitor future developments and consider reviewing existing structures and any potential steps that need to be taken. The nature (if any) of the steps will depend on the existing position. For instance, taxpayers currently subject to tax on income under s721 ITA 2007, when the relevant transfer was to a person who is a tax resident in the EU, may wish to consider making a claim to exempt such income (on the grounds that the rules appear contrary to EU law and ought not to apply). Similarly, taxpayers who are suffering an attribution of gains realized by non-UK resident companies may wish to consider making a claim based on EU law. Advice should be sought from an EU tax specialist before any such claims are made.
Tax professionals in the UK note that this is a period of uncertainty and that it is less clear how that uncertainty will be resolved—for example, may the UK government respond to any such challenge by imposing a similar tax charge on certain UK companies? However, this approach, while possibly addressing the Commission’s concern, could have a major effect on a key area of UK tax policy. At present, the UK tax system keeps some balance between incorporated and unincorporated business by allowing for a reduced rate of corporate tax (21%) for smaller profit levels compared to the income tax rate of 50% at its highest. If profits are distributed as dividends, further income tax is paid so the overall tax rate on profits can be around the same as for an unincorporated business at between 21% and 50%. Extending these anti-avoidance rules to UK companies would add compliance costs for small companies and accelerate or increase the income tax charge on their owners. This could have a major impact on small business in the UK. Observers therefore believe that it seems more likely that the UK government will look instead to “disapply” the current rules only when EU companies are used for genuine business purposes, other than to accumulate income.
One thing seems clear—the “landscape” as currently known is set to change forever. All taxpayers need to reflect now on how to position themselves for this change.
KPMG, the UK member firm, reports on this development and other topics (listed below) in an 11-page report:
- Recent Tribunal decision potentially extends principle of purposive interpretation
- Online filing - transitional arrangements
- UK VAT cases update
- AIFs investing in offshore funds
- Statutory instruments regarding IHT disclosures published
For a printable version of the KPMG report (11-pages):
Weekly Tax Matters (February 21, 2011)
For more information, contact a U.S.-based UK tax professional:
David Nickson, Seconded UK Tax Partner, (973) 912 6537,
Russell Fielder, Seconded UK Senior Manager, (212) 872 3822,
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The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.
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