The 34-page consultation document, which may be viewed by clicking here, concerns legislation that currently gives the Revenue the right to “look through” certain offshore structures, in order to tax income that is going to UK resident individuals.
The first of the provisions relates to chargeable gains realised by UK resident individuals through a closely controlled, non-resident company, while the second has to do with the tax treatment of income realised by UK resident individuals after the assets which are producing the income have been transferred abroad.
The latter provision dates back to 1936, and was intended to prevent individuals from moving assets out of Britain in order to avoid having to pay UK tax on future gains.
‘Exempt commercial transactions’
Among the Treasury’s ideas for making the first of the provisions more EU-friendly include devising a way of identifying whether assets in question, held by a foreign company, are "genuinely and effectively employed in a business establishment" — raising the question, the consultation document notes, "of how to identify a ‘business establishment’", and whether in establishment is undertaking "economically significant activities".
An alternative to this scheme is also proposed, which the Treasury refers to as a "motive test", and would involve granting "an immediate and convenient exclusion for any taxpayer who can show there is no tax avoidance motive at all in relation to arrangements of which [an] acquisition, holding or disposal of an asset formed part".
This would expand the categories of assets excluded from charge, in order, the Treasury says, to strike a better balance between protecting tax receipts and allowing individuals to pursue genuine economic activity across borders.
With respect to the second of the anti-avoidance provisions at issue, involving asset transfers, the Treasury proposes adding a further exemption test, and to amend the definition, for the purpose of this legislation only, of what constitutes a “person abroad”.
True commercial transactions would be exempted from the existing tax imposed on the transfer of assets abroad, so that the anti-avoidance provisions would apply only to so-called “artificial” transactions, “or display artificial features”.
Importantly, the Treasury proposes amending the legislation in such a way that a company that is incorporated overseas, "but is resident in the UK by virtue of its management and control, will no longer be regarded as resident outside the UK for the purposes of the transfer of asset rules".
Again, the Treasury’s aim here is to strike a better balance than the EU feels is now the case between protecting the UK’s tax receipts, and allowing UK individuals to pursue genuine economic activity across the EU’s borders.
What the EC was thinking
In the introduction to its consultation, the Treasury explains the European Commission’s thinking, noting that “the EC’s view is that measures must not go beyond ‘what is reasonably necessary in order to prevent abuse or tax avoidance and any other requirements in the public interest’”.
“It takes the view that these current UK tax rules are ‘disproportionate’ and therefore incompatible with the treaty freedoms of the single market,” the Treasury adds.
However, it adds, “the Commission accepts that EU law has established that ‘abuse’ may be counteracted where there is evidence of an intention to obtain an advantage through artificial creation of the conditions for obtaining it such that the purpose of the treaty provisions is not achieved”.
UK tax experts note that the new provisions could oblige individual investors to have their investments declared personal or commercial, in order to be sure of not falling foul of the tax laws.
Observing that one of the Treasury’s proposed fixes involves a “motive test”, Scott Devine, Policy Manager at the Society of Trust and Estate Practioners, pointed out that such tests "have proven problematic in the past", however welcome any laws aimed at reducing uncertainty for taxpayers are.
A Treasury spokesman, meanwhile, noted that the proposed changes were not to be seen as "a green light for avoidance activity", and that HMRC’s anti-avoidance strategy "will not be undermined".
UK individuals looking to expand their businesses overseas, meanwhile, may benefit, he added, "as it will be explicit that transactions undertaken for the purposes of genuine commercial activity abroad will not be caught by the anti-avoidance rules".
The closing date for comments is 22 October.