Anti-avoidance tax legislation 

The referral to the ECJ is the next stage of the infringement procedure and follows the issue of reasoned opinions in February 2011 in which the EC formally requested the UK to amend two anti-avoidance measures:

• the transfer of assets abroad legislation (Chapter 2 Part 13 ITA 2007, previously s739 et seq ICTA 1988); and
• the attribution of gains to participators in non-UK resident companies legislation (s13 TCGA 1992).

These provisions reduce the opportunity for individual taxpayers to shelter their income and gains from UK tax by the simple expedient of holding assets in an offshore structure. Where they currently operate, their effect is to pierce the veil of the offshore structure and essentially make the income and gains taxable in the UK.

The EC stated in their press releases of 24 October 2012 (IP/12/1146 and IP/12/1147) that they view these measures as being "disproportionate, in the sense that it goes beyond what is reasonably necessary in order to prevent abuse or tax avoidance”. The EC believes (see IP/11/158) discrimination exists as, if the individual had invested assets in a UK resident structure (rather than for example in a company in another EU country), the individual would not be subject to tax; only the UK resident company would be taxed on its income and gains.  The legislation, the EC state, poses a restriction on the principles of the freedom of establishment and the free movement of capital contrary to EU rules (see again IP/11/158).

On 30 July 2012 HMRC published a consultation document on the reform of these anti-avoidance provisions.  The consultation proposed, inter alia, new rules with the aim of ensuring the legislation is compatible with EU law while at the same time protecting the Exchequer.  Broadly, the consultation document proposed:

• introducing an avoidance motive test to s13 TCGA 1992 and expanding the categories of assets excluded from charge to include those used for “economically significant activities” outside the UK;
• adding a further exemption test to the transfer of assets legislation based on objective criteria, again exempting transfers for “economically significant activities”; and
• making other improvements to the two anti-avoidance regimes.

KPMG welcomed the proposals and was actively involved in the consultation which closed on 22 October 2012.

On 11 December 2012 the draft Finance Bill 2013 clauses were published.  The proposed new exemptions to s13 remain broadly unchanged.  The new exemption from the transfer of assets legislation has been amended and now contains a provision which provides for exemption if not to do so would breach one of the fundamental freedoms under EU law.  While maybe technically EU compliant, this does leave taxpayers with a degree of uncertainty.  The draft Finance Bill clauses are subject to consultation until 6 February 2013 and KPMG will be involved in this process. It remains to be seen whether the final version of the legislation will satisfy the EC and/or ECJ.

These provisions are a key part of anti-avoidance legislation in the UK regarding non-UK structures.  Any change could have a profound impact on how individuals operate their non-UK businesses and hold their non-UK investments.

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 consider any steps which should be taken. 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?

The nature (if any) of the steps client might wish to take will depend on the existing position. However, areas to consider include the following:

• Taxpayers currently paying tax on income under the transfer of assets abroad rules, 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.

It is clear that the period of uncertainty continues. One thing above all does seem clear however. The offshore 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.