United Kingdom

Anti-avoidance tax legislation 

Are you an individual with or benefitting from an offshore structure? Are you aware of the changes to key parts of UK anti-avoidance legislation affecting non-UK structures?  Any change could have a profound impact on how individuals operate their non-UK businesses and hold their non-UK investments.
European Commission

Background

On 24 October 2012 the European Commission (EC) announced its intention to refer the UK to the European Court of Justice (ECJ) in relation to two fundamental 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).


This referral was made at the same time as the UK authorities were consulting on proposed changes to these rules.


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).

UK Government Consultation and draft legislation

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, with amended legislation following on 28 March 2013, a week after the 2013 Budget.  The new exemptions to s13 remain broadly unchanged.  The new exemption from the transfer of assets legislation has been amended and now contains a novel 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 Finance Bill clauses will now progress through Parliamentary Committees before becoming final upon Royal Assent, expected in July 2013.  It is possible that further changes will be made during this process.  However it remains to be seen whether the final version of the legislation will satisfy the EC and/or ECJ.

What does this mean for our clients?

These provisions are a key part of anti-avoidance legislation in the UK regarding non-UK structures.  The changes 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 continue to closely monitor the position. In the meantime 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 you 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.


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. For more information, please speak to your usual KPMG Tax & Pensions contact.

Contact

  

Chris Morgan

 

Partner
KPMG LLP (UK)

020 7694 1714

christopher.morgan@kpmg.co.uk