Tax evasion involving profit splitting for income tax and corporation tax

Who is likely to be affected

Persons who carry on a trade or profession subject to UK taxation, either as a sole proprietor, in partnership or through a company (in the latter case it is likely that the company will be a business managed by its owner), but only where arrangements are in place so that the value is transferred from a UK trader to an offshore entity.

General description of the measure

From April 2019, this targeted legislation aims to prevent UK traders and professionals from avoiding UK tax by having their UK taxable trading profits accrue to entities resident in jurisdictions where the tax is considerably lower than in the UK. The counter-attack will be effected by adding these profits to the profits of the British trade.

Political objective

The aim of the measure will be to ensure that the amount of profit which should be taxable in the UK is fully taxed in the UK.

Context of the measure

This measure was announced in the 2017 fall budget. A consultation document was published on April 10, 2018. The consultation closed on June 8, 2018.

The first bill and a response document were released on July 5, 2018. This was followed by a technical consultation period that ended on August 31, 2018.

Following consultation on the bill, the government decided to remove the requirement to notify HMRC of relevant provisions that meet certain criteria.

This tax information and impact note (TIN) replace the TIN published together with the bill on July 5, 2018.

Detailed proposal

Effective date

The measure will come into effect on April 1, 2019 for corporation tax and April 6, 2019 for income tax and Class 4 national insurance contributions, and will apply to all misappropriated profits from from this date.

Current law

The current law is contained in Part 2 of the Income Tax (Trading and Other Income) Act 2005 (ITTOIA) and Part 3 of the Corporation Tax Act 2009 (call to action 2009). These contain the main tariff provisions for the taxation of the profits of a trade.

Article 6 of ITTOIA deals with the territorial scope of income tax. Profits from a trade derived from a UK resident are subject to UK tax wherever the trade is carried on. Profits from a trade in or development of UK lands derived from a non-resident of the UK are subject to UK tax wherever the trade is carried on. Profits from a transaction originating from a non-UK resident are only taxable in the UK if they arise:

• of a business carried on entirely in the United Kingdom
• in the case of a business carried on partly in the United Kingdom and partly elsewhere, that part of the business carried on in the United Kingdom

Article 5 of call to action 2009 deals with the territorial scope of corporation tax. A UK resident company is liable to corporation tax on all its profits, wherever they arise. A non-UK resident company is only liable to corporation tax if it carries on a trade:

• to trade or develop British land
• in the UK via a permanent establishment in the UK

A non-resident UK company which carries on business in the UK through a permanent establishment in the UK is liable to corporation tax on its profits which are chargeable profits as defined in article 19 of the call to action 2009 (profits attributable to its permanent establishment in the United Kingdom).

Legislation in Part 13 of the Income Tax (Transfer of Assets Overseas) Act 2007 imposes income tax on a person making a relevant transfer where certain additional conditions apply . This legislation may apply to some of the arrangements or parts of the arrangements that will be affected by this measure.

Proposed revisions

Targeted legislation

Legislation will be introduced in the Finance Bill 2018-19 which will consider whether certain features are present as follows:

• there must be a transfer of value from the UK trader to an offshore entity – this could be a diversion of income to the offshore entity or the payment of expenses to the offshore entity
• the effect of the arrangement must be that a significantly lower level of tax is paid on the profits than would be the case if they were properly taxed in the UK under current law
• the owner of the business, whether as a sole proprietor or partner in an unincorporated business, or as a director and/or shareholder of a corporation must be able to benefit from the profits that have been diverted
• the UK person must have arranged for the profits to be diverted to the offshore entity
• the diversion or payments mentioned in the first condition are not commensurate with the work undertaken by the offshore entity

Where these conditions are met, the arrangement must be frustrated by bringing the profits back into UK tax by allocating the correct amount of profits to the UK taxable source.

Summary of impacts

Impact on Treasury (£m)

These figures are presented in table 2.1 of the 2018 budget as part of a package of measures entitled “Offshore: preventing profit fragmentation, extending VAT grouping rules and preventing the closure of avoidance schemes” and have been certified by the Office for Budget Responsibility. More details can be found in the policy costing paper released alongside the 2018 budget.

Economic impact

This measure is not expected to have significant macroeconomic implications.

Impact on individuals, households and families

This measure is likely to affect around 1,000 people, many of whom may need to make adjustments under these new rules.

This measure has no impact on individuals and households since it only concerns individual traders, general partnerships and businesses in operation.

The measure should not affect the formation, stability or breakdown of the family

Equalities impacts

It is not expected that there will be any particular impacts on groups sharing protected features.

Impact on businesses, including civil society organizations

This measure is likely to affect around 1,000 people carrying on business in the UK as sole traders, in partnership or carrying on a trade or profession through a company, many of whom may have to make adjustments under these new rules.

All businesses transacting across borders will bear a one-time cost of familiarizing themselves with the new rules. This cost is expected to be negligible.

There is no impact on civil society organizations

Operational impact (£m) (HMRC or other)

The information technology and operational impacts on HMRC for this measure are negligible.

Other effects

Other impacts were taken into account and none were identified.

Monitoring and evaluation

The measure will be monitored through information gathered from tax returns and HMRC compliance work.

Additional tips

If you have any questions about this change, please contact Chris Stewart by phone: 03000 519 402 or email: profitfragmentation.mailbox@hmrc.gsi.gov.uk.