The Finance Bill recently published in the UK, contained
regulations relating to 'Profit Fragmentation'.
Broadly, the legislation aims to prevent UK taxable profits being
diverted to an overseas entity, where the overseas entity is in a
lower tax jurisdiction.
Profit fragmentation occurs when there is a 'transfer of value' from a UK entity to one overseas, there is a 'tax mismatch' between the tax payable in the UK and the overseas jurisdiction and that a UK resident is able to enjoy the benefit of the profit fragmented. For example, a UK entity carries out work for an overseas entity in Cayman Islands and the fees charged (or expenses claimed) are not at arm's length, and the UK trader or professional (or related party) is able to enjoy the profits that have been diverted. Where this occurs, HMRC will require the 'transferred profits' to be added to the assessable UK income and taxed accordingly.
It is important to note that the requirement to notify HMRC if the tax payer fell within these provisions contained in the draft Finance Bill have been dropped from the final provisions. Also, the exemptions where the value is otherwise considered under Transfer Pricing, Controlled Foreign Company regime or Diverted Profits tax have also been removed. Exemptions now only exist for transfers of value where there is no tax mismatch or where tax avoidance was not the main motive, or one of the main motives for making the transfer of value.
At Duff & Phelps, we can help you analyse the new legislation and assist you to ascertain if the new provisions apply to your business and if so how (i.e. ascertain whether there is a tax mismatch). We can also assist with a transfer pricing report, if documentation is required to support your filing position.
At the Autumn Budget 2017 the Chancellor announced an extension to Entrepreneur's Relief ('ER') conditions for individuals who may previously have lost their entitlement to the relief due to a dilution of their holding following a restructuring of the company shares. As part of the Finance Bill (No.3) 2018 legislation was published which now allows individuals to bank ER on certain disposals before their 5% shareholding becomes diluted. As part of this change individuals will be able to make an election to make 'notional disposal' immediately prior to the share issue which would result their holding becoming diluted which means that they would still be eligible for ER on any gains made up until that point. They would then be treated as requiring those shares at their current market value. In addition to this a further election can be made which defers the crystallization of the gain until an actual disposal of the shares has been made. It is important to note that there are anti-avoidance provisions in place which set the share issue which results in the dilution should have been made for 'genuine commercial reasons' and not for the purposes of avoiding tax.
In addition to this at the Autumn budget 2018 the Chancellor announced two additional tests will need to be met from October 29, 2018 for the definition of a 'personal company' to be satisfied in addition to 5% share capital and 5% voting rights which must be met;
- An individual must be entitled to at least 5% of the company's distributable profits; and
- 5% of the assets available for distribution to equity holders in a winding up of the company.
These conditions have now been included in the legislation as part of the Finance Bill. In addition, new legislation was introduced to revise the minimum holding period requirement for individuals who dispose of all or part of their business or individuals who dispose of shares in their personal company on or after April 6, 2019. Previously an individual to qualify for ER the period for which the qualifying conditions needed to be met was 12 months. This period will increase from 12 months to 24 months for any disposals from April 6, 2019. There is however grandfathering provisions where an individual's personal company ceased to be trading (or holding company of a trading group) or the individuals business ceased before October 29, 2018 then the existing one-year qualifying period will continue to apply. These revisions will be important to consider when considering future group restructurings or allocations of partnership interests as it may mean that additional rights need to be given to shareholders or members for a longer period to satisfy the tests for relief.
Draft legislation has been released to tax (at 20%) the amounts received by a foreign entity for intangible property where the amounts received are referable to services or goods provided in the UK. This tax will apply from April 6, 2019.
There are a number of exemptions:
- where the value of UK sales does not exceed £10million per annum;
- The activity substantially all occurs in the foreign jurisdiction and has not previously been transferred from the UK to that jurisdiction; and
- The amount of tax paid in the foreign jurisdiction is at least 50% of the UK tax which would have been levied.
These rules will impact businesses that hold intangible property such as "black box" trading strategies, investment management mandates and distribution agreements offshore in low tax jurisdictions without a tax treaty with the UK where amounts are received in these jurisdictions referable to services performed in the UK. If you think you might be impacted, we can help you review your arrangements and determine what the filing position or disclosure is under the new rules.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.