Section 26, Schedule 10: Transfer of Assets Abroad
Summary
1.Section 26 introduces Schedule 10 which makes changes to the “transfer of assets” anti-avoidance legislation in Chapter 2 of Part 13 of the Income Tax Act (ITA) 2007. This legislation applies to UK resident individuals who have transferred assets so that income has become payable to an overseas person, while the UK resident individual continues to be able to enjoy the income of the person abroad, or receive a capital sum directly or indirectly from the income. The legislation also applies to UK resident individuals who have not made the transfer which results in the income arising to the person abroad, but who can benefit directly or indirectly from the income arising. The changes do two things. They provide a new exemption from charge for “genuine transactions” where European Union treaty freedoms are engaged, and they make a series of other changes to the transfer of assets provisions aimed at clarifying the way certain aspects operate.
Details of the Schedule
Part 1
2.Paragraph 1 is introductory and provides for Chapter 2 of Part 13 of ITA 2007 (the transfer of assets abroad provisions) to be amended.
Part 2
3.Paragraph 2 sub-paragraph (2) amends the definition of a ”person abroad” in section 718 ITA 2007 so that a person abroad for the purposes of the transfer of assets legislation is:
either a person who is resident outside the United Kingdom, or
an individual who is domiciled outside the United Kingdom.
Therefore a company’s domicile is not relevant in determining whether the company is a ‘person abroad’. A company will be a ‘person abroad’ if it is resident outside the United Kingdom.
4.Paragraph 2 sub-paragraph (3) provides that sub-section 718 (2)(a) is omitted with the result that UK resident companies that are incorporated outside the UK will no longer automatically be treated as a ‘person abroad’ for the purposes of this legislation.
5.Paragraphs 3, 4 and 5 make amendments to section 720 ITA 2007 consequent upon the introduction of new section 742A.
6.Paragraph 6 makes further amendments, in this case to section 736 ITA 2007, consequent upon the introduction of new section 742A. It also provides for new section 742A to exempt relevant transactions effected on or after 6th April 2012.
7.Paragraph 7 inserts new section 742A (a new exemption for genuine transactions) into Chapter 2 Part 13 of ITA 2007.
8.Subsections (1) and (2) of new section 742A provide that income is to be left out of account (that is, it will be exempt from charge) if an officer of HMRC is satisfied that it is attributable to a transaction that takes place on or after 6 April 2012 and which meets Conditions A and B.
9.Subsection (3) of new section 742A sets out Condition A. Condition A is met where, if the transaction in question were to be considered to be a genuine one (when viewed objectively, having regard to the circumstances under which it was effected and any other relevant circumstances), and gave rise to a transfer of assets charge, that liability would constitute an unjustified and disproportionate restriction on a relevant EU treaty freedom.
10.Subsection (4) of new section 742A sets out that provisions of the Treaty on the Functioning of the European Union and the EEA Agreement (or any subsequent treaty replacing either of those provisions) are to be considered as relevant for the purposes of subsection (3). They contain the four freedoms mentioned in subsection (3): freedom of movement of persons, capital, services and goods.
11.Subsection (5) of new section 742A sets out Condition B. Condition B is met where an officer of HMRC is satisfied that the transaction in question should be considered genuine when viewed objectively, having regard to the circumstances under which it was effected and any other relevant circumstances.
12.Subsection (6) of new section 742A makes further provision, about what constitutes a “genuine” transaction for the purposes of meeting Conditions A and B. A transaction will not be considered genuine where it is made other than on arm’s length terms. A transaction is not on arm’s length terms if either :
it is on terms other than those that would have been made between persons not connected with each other dealing at arm’s length, or
it would not have been entered into at all between persons not connected with each other dealing at arm’s length.
When considering whether a transaction is on arm’s length terms regard must be had to all arrangements and relevant circumstances in connection with which the transaction is carried out.
13.Subsection (7), (8) and (13) of new section 742A make further provision about what constitutes a “genuine” transaction. These provisions concern the use of the assets transferred; any assets directly or indirectly representing those assets; any income arising from the assets transferred and any assets representing the accumulation of income arising in relation to the transaction being considered. That transaction may be a relevant transfer (as defined in section 716), or an associated operation (as defined in section 719).
14.Where such assets are used for the purposes of, or received in the course of, activities carried out in a territory outside the UK, by a person who has a business establishment in that territory, in order for the transaction to be considered to be a genuine transaction, those activities must consist of the provision, by the person who has the business establishment in the overseas territory, of goods or services to others on a commercial basis. The activities must involve the use of sufficient staff with the appropriate level of competence and authority to carry out them out. The activities must involve the use of premises and equipment commensurate with their size and nature. And the activities must involve the person who has the business establishment adding a commensurate level of economic value to the customers to whom the goods or services are provided.
15.Subsection (9) of new section 742A defines “staff” as employees, agents or contractors engaged by the person who has the overseas business establishment.
16.Subsection (10) of new section 742A explains how to determine whether a person has a “business establishment” in a territory, by analogy with the provisions at sections 1141, 1142(1) and 1143 of the Corporation Tax Act 2010 which define a permanent establishment of a company.
17.Subsection (11) of new Section 742A sets out circumstances where the arm’s length test in subsection (6) does not apply to a transaction. This will be the case where:
the relevant transfer is made by an individual wholly for personal (not commercial) reasons, for the personal benefit (not commercial) benefit of other individuals,
no consideration is given (whether directly or indirectly) for the relevant transfer or otherwise for any benefit received by the other individuals, and
all the assets and income described in subsection (12) in relation to the transaction being considered, are used only in this respect.
This may be the case where, for example, an individual settles assets into a non-resident trust for the benefit of his family.
18.Subsection (12) of new section 742A defines assets and income for the purposes of subsections (7) and (11) as:
any of the assets transferred by the relevant transfer ,
any assets representing any of the assets transferred,
any income arising from the assets within (a) or (b),
any assets representing the accumulations of income arising from any assets within paragraph (a) or (b).
19.Subsections (14) and (15) of new section 742A apply where a transaction is not shown to be genuine because it does not fully meet the requirements of subsection (6). They provide for income shown to be attributable to that part of a relevant transaction which is genuine to be exempt from the charge whilst the part which is not shown to be genuine will be subject to the charge.
20.Paragraph 8 inserts a provision into section 751 of ITA 2007 to extend the jurisdiction of the tribunal on any appeal to cover the new section 742A.
21.Paragraph 9 sets out the dates from which the changes in Part 2 of the Schedule take effect. Sub-paragraph (1) provides for resident companies which are incorporated abroad to be treated as resident with effect from 6th April 2012. Sub-paragraph 2 provides for all other amendments set out in part 2 to take effect for the 2012-13 and subsequent tax years.
Part 3
22.Paragraph 10 sub-paragraph (1) provides that amendments will be made to section 721 (individuals with power to enjoy income as a result of a relevant transaction).
23.Paragraph 10 sub-paragraph (2) clarifies that the income that would be chargeable to income tax if it were the individual’s in Condition B in section 721(3) is the income of the person abroad.
24.Paragraph 10 sub-paragraph (3) inserts new subsection (3A) and new subsection (3B) into section 721.
25.New subsection 721(3A) clarifies that the income that is treated as arising to the individual in subsection 721(1) is not the income that the individual abroad receives, but an amount that is equal to it. This is subject to the provisions in section 724 (where benefit is provided out of the income of a person abroad) and 725 (where the income that the individual can enjoy form part of the profits of a controlled foreign company).
26.New subsection 721(3B) provides that where the individual has been charged to tax on the deemed income in subsection 721(1) under provisions other than those in Chapter 2 of Part 13 ITA 2007, and that income tax liability on the deemed income has actually been paid, then there is no further charge under section 721.
27.Paragraph 10 sub-paragraph (4) clarifies that the income referred to in subsection 721(4) is the income of the person abroad and achieves consistency of drafting in the section as a whole.
28.Paragraph 10 sub-paragraph (5) removes the provision which allows section 721 to apply even where income might be chargeable under other provisions. It is an amendment consistent with new subsection 721(3B).
29.Paragraph 11 sub-paragraphs (1) to (3) make amendments to section 724 in order to make it clear that where this section applies the tax charge under section 720 is on an amount which is equal to the amount or value of the benefit that the individual can enjoy rather than on the benefit itself.
30.Paragraph 12 amends section 725 which provides for a reduction in the amount charged under section 721 where there is a controlled foreign company involved.
31.Sub-paragraph (2) of paragraph 12 amends subsection 725(1), which is amended by paragraph 22 of Schedule 20 to FA 2012. Subsection 725(1) provides that section 725 applies where an amount of income is treated as arising to an individual under section 721 and the income arising to a person abroad includes an amount forming part of a CFC’s chargeable profit.
32.Sub-paragraph (3) of paragraph 12 inserts new subsections (2A) and (2B) into section 725. These provide a formula to determine the reduction in the amount of income to be treated as arising to an individual where (i) there is a CFC involved and the amount of income treated as arising to the individual is reduced under section 725 as a result and (ii) the special rules in section 724 apply to determine the amount on which an individual is chargeable rather than section 721.
33.Sub-paragraph (4) of paragraph 12 provides that where the amendments made to section 725(1) by paragraph 22 of Schedule 20 to FA 2012 are to be ignored then sub-paragraph (2) does not apply. Instead subsection 725(2) is amended by sub-paragraph (5).
34.Sub-paragraph (5) of paragraph 12 amends subsection 725(1) where paragraph 22 of Schedule 20 to FA 2012 is to be ignored. The amendments to subsection 725(1) are to provide clarification.
35.Paragraph 13 amends section 726 to reflect that the income treated as arising to an individual under section 721 is an amount equal to the income of the person abroad.
36.Paragraph 14 sub-paragraphs (1) to (5) makes amendments to section 728.
37.Sub-paragraph (2) inserts new subsection 728(1A) which provides that the amount of income treated as arising to an individual under this section is equal to the amount of the income of the person abroad (subject to subsection 728(2)).
38.Sub-paragraph (3) makes consequential amendments to subsection 728(2) as a result of the amendments to section 725 which applies in determining the amount of income treated as arising to an individual under section 728.
39.Sub-paragraph (4) inserts new subsection 728(2A) which provides that where an individual has been charged to tax on income that is treated as arising to them (under subsection 728(1)) under provisions other than those in Chapter 2 of Part 13 ITA 2007, and that income tax liability on the deemed income has actually been paid, then there is no further charge under section 728.
40.Sub-paragraph (5) deletes subsection 728(3)(a).
41.Paragraph 15 amends subsection 730(2) to reflect that the income treated as arising to an individual under section 728 is an amount equal to the income of the person abroad.
42.Paragraph 16 amends section 743.
43.Sub-paragraph (2) inserts new subsection 743(2A) and (2B) which provide that where an amount of income is taken into account in charging an individual to income tax under section 720 or 727 and that income is subsequently received by the individual then it will not be charged to tax again. Subsection 743(4) is consequently deleted.
44.Paragraph 17 makes consequential amendments to section 744 to reflect the various amendments in Part 3 of this Schedule.
45.Paragraph 18 makes consequential amendments to section 745 to reflect that sections 721 and 728 have been amended to provide that the income treated as arising under these sections is an amount equal to the amount of the income of the person abroad.
46.Paragraph 19 makes consequential amendments to subsection 746(2) to reflect that sections 721 and 728 have been amended to provide that the income treated as arising under these sections is an amount equal to the amount of the income of the person abroad.
47.Paragraph 20 provides for the amendments made by paragraphs 10 to 19 to take effect for 2013-14 and subsequent tax years and to apply to all relevant transfers whether they occurred before, on or after 6th April 2013.
48.Paragraph 21 provides that the new sections 721(3B) and 728(2A) only take effect only where the income abroad arises to the person abroad after 6th April 2013.
Background
49.This legislation updates this anti-avoidance provision to maintain its compatibility with EU law, and makes certain other amendments to improve the clarity of the rules.
50.Broadly, the “transfer of assets” rules impose a charge to income tax on an individual who is ordinarily resident in the UK (or, from 6 April 2013, an individual who is resident in the UK) where there has been a transfer of assets and, as a result of the transfer (and/or any associated operations), income becomes payable to a person abroad, but an individual can still enjoy income, or receive or have entitlement to receive a capital sum or other benefits from the arrangements.
51.An infraction notice (Reasoned Opinion) was issued by the European Commission on 16 February 2011. The Commission argued that the transfer of assets legislation breaches the treaty freedoms of establishment and movement of capital.
52.On 30 July 2012 the Government published a consultation document proposing a way of reforming the legislation to ensure EU compatibility, and also certain other changes to improve the clarity of the provisions. The Government's response to the consultation was published on 11 December 2012, together with draft legislation.
53.The legislation adds a new exemption which operates where the EU treaty freedoms are engaged and which focuses on whether the nature of transactions is genuine and whether they serve the purpose of the freedoms. (There is an existing exemption where there is no tax avoidance purpose, or where the transactions are genuine commercial transactions, and any tax avoidance purpose was incidental.) Business transactions will not be regarded as genuine unless they are on arm's length terms and, in the case of transactions for the purposes of a business establishment, give rise to income attributable to economically significant activity that takes place overseas.
54.These changes will provide exemption for genuine commercial business activities overseas and also for transactions that do not involve commercial activities but that are nevertheless genuine transactions that are protected by the single market.
55.There is also a provision which allows for the bifurcation of a relevant transaction into a part which is genuine and a part which is artificial, so that the transfer of assets tax charge only falls on income from the artificial part of the transaction.
56.The statutory definition of a ‘person abroad’ for transfer of assets purposes is amended by this legislation so that a company’s domicile status is not taken into account to determine whether it is a ‘person abroad’. A company will be a ‘person abroad’ if it is resident outside the United Kingdom. Companies incorporated outside the United Kingdom but nevertheless resident in the United Kingdom for tax purposes will no longer automatically be treated as a ‘person abroad’ for these purposes.
57.This legislation also makes a series of other changes to the transfer of assets provisions aimed at clarifying the way certain aspects operate.
58.There is an amendment to provide greater clarity around the prevention of double charging, in circumstances where the same income could be the subject of both a transfer of assets charge and also a charge under another part of the Taxes Acts.
59.Finally there is a change that clarifies how the transfer of assets rules operate in relation to reliefs under double taxation agreements. This will make it clear that neither a treaty provision nor the transfer of assets legislation can allow a relief that would not otherwise be due.
