Reform of an anti-avoidance provision: Transfer of Assets Abroad Consultation Response The Law Society October 2013
Introduction The Law Society is the representative body for more than 166,000 solicitors in England and Wales ('the Society'). The Society negotiates on behalf of the profession, and lobbies regulators, government and others. This response has been prepared by the Society s Company Law Committee. 1. The Law Society of England and Wales welcomes the opportunity to respond to the FCD. 2. Subsequent to the FCD, our representative attended a working group meeting on 6 September 2013. On 24 September 2013 the HMRC chairman of that working group set out in an e-mail HMRC s views and feedback in the light of the discussions at that meeting. 3. The FCD set out the Government s responses to the previous consultation document issued in July 2012. It also invited further four further questions (at part 3) after each of the Government s responses as follows on: Q1. Draft guidance (at INTM601680) on when relevant income is determined; Q2. Increasing certainty as to allocation of relevant income without tax avoidance; Q3. Alternatives to the just and reasonable apportionment under ss743 and 744 ITA 2007; Q4. Reform of matching rules for resident non-domiciliaries to give greater certainty but managing complexity and operational difficulties. 4. The FCD then set out four options for reform to the current matching rules: 4.1 Amend the December 2012 draft legislation. 4.2 Retain the current legislation but provide greater clarity through guidance. 4.3 Amend the current legislation to provide greater certainty. 4.4 Introduce a completely new set of matching rules. 5. Before commenting more specifically on the four questions contained in the FCD and four proposed options for the matching rules, we wish to make the following points:
5.1 Firstly, we would emphasise the importance of identifying the mischief which is to be addressed by anti-avoidance legislation such as the TOAA rules. (b) The non-transferor legislation introduced in 1981 was principally aimed at beneficiaries of offshore trusts established by UK domiciliaries. The UK taxation of offshore trusts has changed considerably since then and the avoidance issues are different. Unlike in 1981, most transfer of assets issues now arise in the context of offshore trusts set up by non-domiciliaries (who may or may not be UK resident). Such structures are commonly set up by nondomiciliaries for succession and asset protection purposes and not to avoid UK tax. (c) The TOAA rules are not just limited to offshore trusts. The number of family-owned cross-border businesses and investment structures has risen substantially in recent years. Where nontransferor shareholders/owners of these become UK resident, they can come within the TOAA rules even where these structures were set-up before they were UK resident and not with an intention to avoid UK tax. (d) (e) (f) There is uncertainty as to what income is protected from the transfer of assets charge by the new genuine transaction relief. In relation to investments, this only applies to income from investments in EU assets which is too restrictive. To address the issues set out in the three preceding paragraphs, we propose a motive defence along the lines of s13(5)(cb)tcga 1992 but referring to income tax rather than to CGT and corporation tax. We also feel consideration should be given to separate rules for the taxation of income for non-transferors of offshore trusts and of other offshore structures. 5.2 Secondly, remittance basis users who are non-transferors are penalised vis-à-vis those who own assets outright. A remittance basis user who segregates income and capital can make payments of capital to the UK without taxation and can make gifts of capital to others who can bring the funds to the UK without taxation. However, a distribution from an
offshore trust whether to the transferor or another beneficiary can be subject to income tax or CGT by reference to income and gains retained in the trust over which the remittance basis user has no control. In addition a non-transferor may be subject to income tax where the trustees or another entity bring matched income to the UK. In contrast, under s87 TCGA, only if the recipient of a capital payment actually remits the capital payment does a tax charge on the recipient arise. 5.3 Thirdly, the sheer complexity of the anti-avoidance legislation, especially when overlaid with the remittance rules mixed funds rules, discourages funds being brought to and invested in the UK by remittance basis users. The Government recognised that and in consequence introduced the investment relief provisions in Finance Act 2012. We welcomed this in principle. However, we cautioned that the anti-avoidance provisions in the legislation were such that that take-up of this relief would be very limited which so far has appeared to be the case. 5.4 Fourthly under a self-assessment regime, the TOAA legislation should enable taxpayers and their advisors to know and ascertain their liabilities. The current rules are so complicated only a small number of specialist advisers can advise on them. Non-transferor beneficiaries did not set up the structures. They are reliant upon others to supply them with information needed to self-assess. Obtaining information from trustees can be difficult particularly as some do not maintain sufficient records and, even if they do, considerable work is required to generate the required data. 5.5 Fifthly, the rules whereby a later associated operation can cause a structure to lose the motive defence protection as respects all income resulting from the original transfer, even if the associated operation only affects a small part of the structure is unfair and disproportionate. We propose that in relation to non-transferors, only relevant income arising after a motive defence is lost should be matchable to capital benefits. We believe any change in this regard may require legislation. 5.6 Sixthly, as to double taxation: HMRC have failed to address most of our representations set out in our response to the July 2012 consultation document on double taxation in the domestic context (ie the same or different people being taxable on the same income under different parts of the Taxes Acts).
(b) In respect of double tax treaties/unilateral relief, there are problems as the income which is taxed under the transfer of assets rules is deemed income, not the actual income of the trustees. The legislation says that the transferor is entitled to the same reliefs as if he had actually received the trustees income but: (1) this does not apply to non-transferors; and (2) while it may give relief where the UK is required to do so (under a treaty or unilaterally) in many cases, another country is required to give the relief. In such cases the treaty often will not apply because the taxable persons are different or the income is different (because the transferor or non-transferor is taxed on deemed income) so the other country will not give relief. This is an issue with, for example, the Israeli and US treaties. 6. In respect of the four proposed options, we comment as follows: 6.1 Option 1. We refer to our response to the July 2012 consultation on which the December 2012 draft legislation was based (attached as an annex) and in particular to: (1) Our response to question 11 (Are rules to match income arising to a person abroad with benefits received by an individual necessary?) (2) Our response to questions 12, 13 and 14 on double taxation issues (b) We also refer to our response of February 2013 to the draft legislation published in December 2012 (also attached as an annex) and in particular to (1) our comments concerning relief from double taxation of non-transferors: 1. in our Further comments on paragraph 10 2. in respect of paragraph 11(2) (see our final bullet point)
3. in paragraph 19 (see our third bullet point) 4. in our response to questions 12,13 and 14 (see our third paragraph). (2) In addition, as mentioned in our response to paragraph 22, we felt the December 2012 draft matching rules did not achieve the stated desire of simplification and indeed that as drafted they introduced potential unfairness as acknowledged in the FCD at page 19. 6.2 Option 4. We doubt there is appetite within either the Government or HMRC for this and accordingly we do not believe it has any realistic prospect of being taken up. 6.3 Options 2 and 3. On balance, our view is that option 2 would in practice be the most realistic one in the circumstances. On that basis we have focused our responses on this option with the aim of that guidance being as clear as concise as possible. 6.4 Where appropriate (such as in instances of potential double taxation) our suggested approach is that the guidance sets out points of principle and illustrate these with examples of commonly encountered situations which set out who is and who is not subject to a transfer of assets charge. We would be willing and able to provide such scenarios as part of the parallel consultation on the draft TOAA guidance. 6.5 On 2 August 2013 HMRC issued over 150 pages of closely-typed draft guidance on some 15 pages of statute law including the Finance Act 2013 amendments. Legislation which requires guidance 10 times its length is not in our view satisfactory. (We note, incidentally, that the August 2013 draft guidance did not appear on HMRC s What s New website in the way that the FCD did on 19 July 2013. This was unfortunate). 6.6 Guidance should not be used as a substitute for legislation. It is preferable that the law is changed or that guidance has the status of an extra-statutory concession upon which taxpayers should have a legitimate expectation of being able to rely. 6.7 We feel much of the complexity to which the extensive draft guidance is devoted results from the overlaying of the matching rules with those
concerning remittance basis of taxation, particularly in respect to mixed funds. 7. In respect of the four questions in the FCD we would comment as follows: 7.1 Question 1 We note HMRC s position as stated at draft INTM601680 repeated at the meeting on 6 September and follow-up e-mail of 24 September. (b) Our view, which was shared by many of those attending the 6 September meeting of the working group is that relevant income ought to be assessed at the point of benefit (and that this is a commonly adopted practice). (c) (d) (e) (f) RI 201 (April 1999) contains the following statement: For the purposes of s740(3) the measure of relevant income is treated as not including such part of the income as has already been genuinely paid away to a beneficiary or to a bona fide charity. RI 201 contains no time limit as to when such genuine payments away must occur. In our view, there are good reasons for that being the case as tax law should follow trust law in the absence of express statutory provisions to the contrary. Income in trust law is not necessarily accumulated to capital at the end of the tax year in which it arises. Indeed, prudent trustees will wish to have accounts drawn-up at the end of the tax year before making decisions as the payment of benefits. Furthermore, it should be possible for guidance to be issued making it clear as to when income is accumulated by (for example) express provisions in the trust instrument, by operation of law or by passage of time (such as where there is a power to accumulate which is not in fact expressly exercised). 7.2 Questions 2 and 3 Whether or not the income has been accumulated, it should be the case that if it has been segregated and has demonstrably been paid away whether as income or capital and whether to a UK resident or non-resident beneficiary, it should cease to be relevant income.
(b) (c) In our experience, a particular problem for taxpayers and their advisors in practice is allocating relevant income between those who are resident and are taxable either as transferors or nontransferors. We feel that clarity could be provided by examples of common situations being included in the guidance. We feel the rule that only relevant income which is available to benefit an individual should be taxable upon any capital benefits being made to him, should remain. 7.3 Question 4 (b) As mentioned above, our view is that much of the complexity of the matching rules is due to different rules for remittance basis users in particular those on constructive remittances by the trustee as a relevant person. We feel a significant simplification would be achieved for remittance basis user non-transferors if the person abroad is treated as if it did not exist. The remittance basis user receiving capital benefits abroad would remain liable to UK tax if any relevant income was remitted under conditions A and D rules under s809l ITA except that the definition of relevant persons for the non-transferor charge would exclude those listed at s809m ITA subsections (e), (f), (g) and (h).