A consultation was carried out on these proposals earlier this year. The draft legislation and a response document were published on 6 July 
2018. There is now a period of technical consultation before the legislation is introduced in the Finance Bill 2018-19.
The measure will have effect from 1 April 2019 onwards for Corporation Tax and 6 April 2019 for Income Tax and Class 4 National Insurance contributions, and will apply to all profits diverted on or after that date.
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 (CTA 2009). These contain the main charging provisions for the taxation of profits of a trade.
Section 6 of ITTOIA deals with the territorial scope of Income Tax. Profits of a trade arising to a UK resident are chargeable to UK tax wherever the trade is carried on. Profits of a trade of dealing in or developing UK land arising to a non-UK resident are chargeable to UK tax wherever the trade is carried on. Profits of a trade arising to a non-UK resident are chargeable to UK tax only if they arise:
- from a trade carried on wholly in the UK
- in the case of a trade carried on partly in the UK and partly elsewhere, from the part of the trade carried on in the UK
Section 5 of CTA 2009 deals with the territorial scope of Corporation Tax. A UK resident company is chargeable to Corporation Tax on all its profits wherever arising. A non-UK resident company is within the charge to Corporation Tax only if:
- it carries on a trade of dealing in or developing UK land
- it carries on a trade in the UK through a permanent establishment in the UK
A non-UK resident company which carries on a trade in the UK through a permanent establishment in the UK is chargeable to Corporation Tax on its profits that are chargeable profits as defined in section 19 of CTA 2009 (profits attributable to its permanent establishment in the UK).
Legislation in Part 13 of the Income Tax Act 2007 (Transfer of assets abroad) charges Income Tax on a person who makes a relevant transfer where certain further conditions apply. This legislation may apply to some of the arrangements or to some parts of the arrangements that will be affected by this measure.
Proposed revisions – Targeted Legislation
Legislation will be introduced in Finance Bill 2018-19 which will consider whether certain conditions 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 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 correctly taxed in the UK in accordance with the current law
- the proprietor of the business, whether a sole trader or partner in an unincorporated business, or as director and/or shareholder of a company must be able to enjoy 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 present the arrangement is to be counteracted by bringing the profits back into UK tax by attributing the correct amount of profits to the UK-taxable source.
Notification of Arrangements
A person will be required to notify HMRC on their tax return if the first 4 conditions set out above apply to their arrangements but they have not made the necessary adjustments to profits in accordance with the legislation. Notification will be required on or before the time that the relevant person is required to submit their tax return for the relevant period.
