Under a recent consultation, the government has set out its proposals for new legislation to tackle tax avoidance arrangements where UK traders and professionals use offshore structures to place profits outside the scope of UK taxation. 

One example given in the consultation is of a UK resident management consultant who provides services to UK and offshore customers. Payments received from the consultant's UK customers are attributed to the UK business and are declared and taxed in the UK. However, payments from the consultant's offshore customers are paid to an offshore company owned by an offshore trust (both located in a zero-tax jurisdiction). Although the offshore company is providing services to offshore customers, it has no assets other than a contract with the UK consultant. The consultant's relatives are beneficiaries of the offshore trust who, through the trust structure, ultimately receive the payments made by offshore customers. 

The proposed changes would introduce:

  1. targeted legislation to bring profits kept outside the scope of UK tax within the scope of UK tax; and
  2. a duty to notify HMRC of arrangements which are potentially caught by the targeted legislation, with a right for HMRC to demand accelerated payment of any tax in dispute. 

The government says it does not intend to catch genuine business activities carried on in low-tax jurisdictions for commercial reasons, but the legislation will need to be carefully drafted to ensure that clients with bona fide commercial arrangements in place are not adversely affected. Even those not subject to tax under the new rules could have an obligation to notify HMRC of their business arrangements as the proposed duty to notify will be broader than the anti-avoidance legislation itself. 

The initial consultation closed on 8 June and the government will publish its response to the consultation and draft clauses this summer. If the proposals are to be enacted, legislation is expected to be included in the 2018/19 Finance Bill.

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