UK and International Tax news

HMRC Launches Tax Avoidance and Profit Fragmentation Consultation

Thursday 12th April 2018

HMRC has launched a consultation to seeks views on the design of new legislation to tackle arrangements which seek to place taxable profits outside the UK tax net.

The government announced in the Autumn Budget 2017 that it would consult on proposals to prevent UK traders and professionals from avoiding tax by arranging for their UK business profits to accrue to entities resident in territories where no tax, or only a low rate of tax, is paid. These arrangements take a number of forms but all involve fragmentation of profit which in substance derives from a single activity but which for tax purposes is said to arise in two or more jurisdictions.

In recent years, HMRC has taken action to ensure that the right amount of profit is taxable in the UK from large businesses carried on by groups partly in the UK and partly elsewhere, including the introduction of the Diverted Profits Tax (2015) and the Hybrids Mismatch legislation (2017).  However, these measures generally apply only to larger enterprises, whilst the avoidance arrangements described in the latest condoc are generally undertaken by individuals, smaller entities or groups.

HMRC has stated that this measure is expected to increase receipts by approximately £50m per annum and is likely to affect around 8-10,000 wealthy individuals who control a small number of businesses, estimated to be in the region of 4-5,000, who are currently involved in tax avoidance arrangements.

The condoc describes examples of typical avoidance schemes which HMRC have become aware of and sets out how it is proposed to counteract such schemes, including the requirement for those who enter into these arrangements to notify HMRC. A user or promoter of such arrangements may also have a duty to notify under the DOTAS rules, as set out in FA 2004.

Responses to the condoc have been requested by 8 June 2018 and, subject to the outcome of the consultation, it is proposed that legislation will be included in the 2018/19 Finance Bill, to take effect from April 2019.

The measure will apply only to businesses that have deliberately set out to reduce UK tax by allocating excess profits to an offshore entity from which they or someone connected with them can benefit and should not affect businesses that pay all UK tax correctly due on their profits.

If you would like further information on the condoc, please contact Keith Rushen on 0207 486 2378.

 

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