HMRC is tightening the screw on tax avoidance involving profit fragmentation
Tax avoidance continues to drive Treasury and HM Revenue & Customs activity.
Over the summer, the Revenue published responses to its consultation on proposals to tackle schemes designed to move UK business profits outside the charge of UK tax, often using offshore trusts and companies, along with draft legislation.
Unlike action taken in recent years to tackle anti-avoidance by larger enterprises, the arrangements described in this instance are seen by HMRC as generally undertaken by individuals and smaller entities..
While respondents agreed these arrangements, when contrived and tax-motivated, are unacceptable and should be prevented, concern was raised about the specific design of the legislation proposed; in particular, the plans for notification and advance payment.
It suggested rules be put in place that require a taxpayer who enters into arrangements of this sort to notify HMRC and that payment of any tax is shown on a relevant charging notice – the idea being to remove the cash flow advantage that would otherwise come from using such schemes. The notification requirement would deliberately be set wider than the conditions required to bring sums into charge, to allow HMRC to examine cases where there is room for doubt over whether the new provisions apply.
This procedure is not unlike that resulting from the issue of an accelerated payment notice. We should not be surprised that cash flow is clearly a big thing
However, respondents were concerned the proposed notification rules were drawn too widely and would bring many compliant businesses into the requirement to notify and cause many more to worry whether they should.
Respondents were particularly concerned in cases where a substance test would clearly
indicate profits had been allocated correctly, and a suggestion was
made to include the option for taxpayers to obtain an advanced clearance, so as to avoid the need
The government has said it will consider additional objective conditions that might be put in place to remove as many compliant taxpayers from the requirement to notify as possible, but without affecting the scope of the legislation in its application to fragmented profits. There could be duplication though, as notification will be required under these rules even if also required under the disclosure of tax avoidance scheme rules.
The government has also decided to postpone:
- The proposals to issue a preliminary notice explaining the reasons for a proposed charge and the basis on which it has been computed, giving the taxpayer a period of only 30 days to make submissions to try to change HMRC’s view.
- The proposals to issue a charging notice, which will require payment of tax and be followed by a review period during which the charge may be adjusted, where HMRC considers a charge is still due (which may differ from that set out in the preliminary notice).
The government will monitor compliance with these new rules and will keep the requirement for an early payment rule under review. One may imply that, if action to shift profits substantially dries up, the need for the rules may fall away.
Other concerns raised from respondents included suggestions of uncertainty that the amount to be charged would require almost a full enquiry process to establish the correct position.
Also that the 30-day period for taxpayers to make submissions against preliminary notices was too short and that some taxpayers may not be able to pay if they do not have access or the right to the funds of
The changes will be finalised for the 2018/19 Finance Bill, after a period of further technical consultation, and are planned to come into effect from 1 April 2019 (corporation tax) and 6 April 2019 (income tax and National Insurance).
The government has promised detailed guidance in advance of the introduction of these changes.
Tony Wickenden is joint managing director of Technical Connection. You can find him Tweeting @tecconn