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United Kingdom: Changes To The UK's Anti-Avoidance Legislation

Thursday, 21 November 2013   (0 Comments)
Posted by: Author: Stuart Gartery
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Author: Stuart Gartery (Mondaq)

In February 2011 the European Commission (EC) issued the UK Government with two notices (reasoned opinions) requiring them to review two areas of the UK's anti-avoidance tax legislation. The EC argued that:

  • Section 13, TCGA 1992 gains attributed to members of a closely controlled non-resident company; and
  • Chapter 2 of Part 13, ITA 2007 transfer of assets abroad

breached the treaty freedoms of establishment and movement of capital.

As a result, the Government were forced to make changes to the UK tax legislation. Finance Act 2013, which received Royal Assent on 17 July 2013, contained amendments which the Government believes ensures that these areas of legislation no longer breach the fundamental freedoms under EU law.

Attribution of Gains to Members of Non-Resident Companies

Section 13, TCGA 1992 operates by attributing chargeable gains realised by non-UK resident closely controlled companies to UK resident participators in proportion to their interests.

Measures contained within the Finance Act 2013 have modified the previous legislation by creating a new exemption which excludes gains deriving from genuine business activity within the EU.

Transfer of assets abroad

This legislation was designed to prevent individuals avoiding UK tax by using offshore structures to shelter income. In broad terms, the transfer of assets abroad rules impose a UK income tax charge on an individual who is resident in the UK where there has been a transfer of assets and, as a result of the transfer, income becomes payable to a person abroad, and a UK resident individual can still enjoy income, or receive or have entitlement to receive a capital sum or other benefits from the arrangement. The rules have typically targeted transfer of assets into non-resident companies and non-resident trusts.

Previously there were exemptions from these charges where the individual could satisfy HM Revenue & Customs that there was no UK tax avoidance motive for the transfer or that the transactions were genuine commercial transactions and any UK tax avoidance was merely incidental.

Finance Act 2013 has modified the existing legislation by creating a new exemption which operates where the EU treaty freedoms are engaged and which focuses on whether the nature of the transactions is genuine and whether they serve the purpose of the treaty freedoms.

A genuine transaction must be on arm's length terms (unless made for personal reasons). Any assets transferred and income arising therefrom must be used, or arise from, overseas activities consisting of the provision of goods or services to others on a commercial basis.

Potential Planning Opportunities

The above changes to the UK's anti-avoidance legislation now provide opportunities for UK resident individuals to establish vehicles undertaking genuine economic activity in other EU countries (for example, Ireland) in order to benefit from lower rates of Corporation Tax.

However, to ensure that income, profits or gains are not attributed to the UK resident individual, the following conditions should apply:

  • The economic activities should consist of the provision of goods or services to others on a commercial basis; and
  • The overseas company must have a suitable presence in the foreign country. Therefore, its activities should involve the use of locally based staff (including employees, agents or contractors), premises and equipment.
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