The proposals are intended to combat avoidance arrangements where profits of trades or professions are moved outside the UK tax charge.
The government announced at Autumn Budget 2017 that it would consult on proposals to stop UK traders and professionals avoiding tax by arranging for UK business profits to accrue in entities resident in low or no tax jurisdictions, which are supposedly performing or providing services but have little or no substance. In reality, the business is carried on by an individual resident in the UK, with any profit allocated offshore being excessive in relation to any services carried out there. The consultation document containing details of the proposals has now been released, giving examples of the most commonly seen arrangements and how the government plans to tackle them.
Some of the existing legislation which can be relevant to these arrangements, such as transfer pricing and diverted profits tax, has specific exclusions for SMEs. Therefore, the government proposals in the consultation document aim to target arrangements used by the types of businesses not covered by the existing rules, with a dual approach:
Proposal 1: The government proposes legislation to target schemes where the following conditions are met:
there are profits attributable to the professional or trading skills of an individual (A) resident in the UK;
some or all of those profits (alienated profits) end up in an entity Z which results in significantly less tax being paid on them than would have been paid had they arisen to A;
A, or a connected person, or someone acting together with A or the connected person, is able to enjoy economic benefits from the alienated profits; and
it must be reasonable to conclude that some or all of Z’s profit is excessive having regard to the profit-making functions it performs with that excess being attributable instead to the connection between it and A.
The new legislation would require these ‘alienated profits’ caught under these conditions, to be added to UK profits. How they would be taxed in the UK would depend on the entity in which it is deemed to arise.
Proposal 2: The consultation document highlights the fact that it is often difficult to obtain the production of information held offshore, leading to long enquiry periods where taxpayers have a cash flow advantage. The government therefore proposes that users of these types of arrangements would need to notify HMRC, to allow enquiries to be initiated and the correct UK tax liability established, on or before the submission of their tax return.
It is also proposed that where HMRC believe tax is chargeable under these new rules, they can issue a charging notice for the amount to be paid within a fixed period.
The consultation is open for comments until 8 June 2018. Any legislation the government decides to take forward following consultation is expected to be enacted as part of the 2018/19 Finance Bill.
Chris Davidson CBE, KPMG (KPMG’s Tax Matters Digest)
Home >Articles > The consultation on avoidance involving profit fragmentation
The consultation on avoidance involving profit fragmentation
The proposals are intended to combat avoidance arrangements where profits of trades or professions are moved outside the UK tax charge.
The government announced at Autumn Budget 2017 that it would consult on proposals to stop UK traders and professionals avoiding tax by arranging for UK business profits to accrue in entities resident in low or no tax jurisdictions, which are supposedly performing or providing services but have little or no substance. In reality, the business is carried on by an individual resident in the UK, with any profit allocated offshore being excessive in relation to any services carried out there. The consultation document containing details of the proposals has now been released, giving examples of the most commonly seen arrangements and how the government plans to tackle them.
Some of the existing legislation which can be relevant to these arrangements, such as transfer pricing and diverted profits tax, has specific exclusions for SMEs. Therefore, the government proposals in the consultation document aim to target arrangements used by the types of businesses not covered by the existing rules, with a dual approach:
Proposal 1: The government proposes legislation to target schemes where the following conditions are met:
there are profits attributable to the professional or trading skills of an individual (A) resident in the UK;
some or all of those profits (alienated profits) end up in an entity Z which results in significantly less tax being paid on them than would have been paid had they arisen to A;
A, or a connected person, or someone acting together with A or the connected person, is able to enjoy economic benefits from the alienated profits; and
it must be reasonable to conclude that some or all of Z’s profit is excessive having regard to the profit-making functions it performs with that excess being attributable instead to the connection between it and A.
The new legislation would require these ‘alienated profits’ caught under these conditions, to be added to UK profits. How they would be taxed in the UK would depend on the entity in which it is deemed to arise.
Proposal 2: The consultation document highlights the fact that it is often difficult to obtain the production of information held offshore, leading to long enquiry periods where taxpayers have a cash flow advantage. The government therefore proposes that users of these types of arrangements would need to notify HMRC, to allow enquiries to be initiated and the correct UK tax liability established, on or before the submission of their tax return.
It is also proposed that where HMRC believe tax is chargeable under these new rules, they can issue a charging notice for the amount to be paid within a fixed period.
The consultation is open for comments until 8 June 2018. Any legislation the government decides to take forward following consultation is expected to be enacted as part of the 2018/19 Finance Bill.
Chris Davidson CBE, KPMG (KPMG’s Tax Matters Digest)
