The Commission view 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 Commission may 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 sections 720 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, where they operate, pierce the veil of the offshore structures and essentially make the profits taxable in the UK.
The Commission believes discrimination exists as, 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 Commission’s alert implies that they are only interested in a transfer of assets to a foreign company; however the rules go further than this as they apply to transfers to any foreign persons. It is unclear at the current time 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 will wish to keep close to future developments and KPMG will be closely monitoring the position. In the meantime, in the light of these announcements, tax payers should review their existing structures and urgently consider any steps which should be taken.
The nature (if any) of the steps will depend on the existing position. However, areas to consider will include the following. Taxpayers currently suffering tax on income under s721 ITA 2007 where the relevant transfer was to a person 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 so should not apply). Similarly, taxpayers who are suffering an attribution of gains realised 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.
Existing structures should be reviewed to see if any action should be taken – for example, possibly extracting profits now rather than retaining them in a “cash box” company (a strategy which might also be considered by non-domiciled taxpayers (who currently benefit from the remittance basis) in case there are retroactive changes to the non-domiciled regime in the UK Budget scheduled for 23 March 2011). Those contemplating new investment structures should also pause for thought before proceeding – is the best vehicle now an offshore company or perhaps a UK one? Should existing structures be moved to an EU vehicle?
It is clear that we are entering a period of uncertainty. It is less clear how that uncertainty will be resolved – for example, might 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 effective tax rate on profits can be around the same as for an unincorporated business at between 21% and 50%. To extend these anti avoidance rules to UK companies would add compliance costs for such 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. It therefore seems more likely that the UK government will look instead to disapply the current rules only where EU companies are used for genuine business purposes other than to accumulate income.
One thing above all does seem clear however. The landscape as we know it is set to change forever. All taxpayers need to reflect now on how to position themselves for change.
For more information, please speak to your usual KPMG Tax & Pensions contact or:
