New anti-avoidance rule targeting transfers of corporate profits
This year's Finance Bill, which is expected to become law as the Finance Act 2014 in July, introduces a new anti-avoidance measure targeted at businesses operating through a group structure where there is in substance a significant "payment" of profits from one company to another.
The measure, potentially of wide application, may impact on what have (up to now) been seen as commercial arrangements in the insurance and reinsurance industry.
The new tax rule will apply where:
- two companies (A and B) are part of the same "group"; and
- A and B are party to "arrangements" which result in substance in A (directly or indirectly making a payment to B of "all or a significant part" of A's profits (or the profits of another group company); and
- one of the main purposes of the arrangements is to secure a "tax advantage" (and not necessarily for A or B).
"Group", "arrangements" and "tax advantage" are each given a wide meaning. Although the securing of a tax advantage (which includes a "reduction" in tax paid or payable) must be a main purpose of the arrangements, in the current climate this may not be a high hurdle for HMRC to overcome.
If the new rule applies, A's profits for corporation tax purposes must be recalculated as though the arrangements leading to the profit transfer had not occurred.
Unlike some anti-avoidance provisions, the new rule does not contain a "commercial" let out. If the arrangements produce a transfer of profits, which in turn causes a reduction in tax take, the arrangements may be ignored for tax purposes.
It is worth noting that although the stated "primary aim" of the new rule to prevent the use of certain marketed schemes to circumvent the operation of another anti-avoidance rule (the obtaining of a UK tax advantage through the use of a "total return swap"), it is explicitly stated that the new rule is not limited to such cases.
HMRC have indicated that they will not normally challenge arrangements if:
- they are ordinary commercial arrangements; and
- they are also arrangements of a kind that are usually entered into by companies operating in the same type of business.
For example, HMRC states that intra-group reinsurance, affected as part of "ordinary commercial arrangements", would "not normally" fall within the scope of the new rule. An example given by HMRC of "ordinary commercial" reinsurance is where the profitability of the ceding company is taken into account in determining the premium payable.
What have (up to now) been seen as commercial arrangements that might be under threat include:
- the aggressive use of reinsurance;
- the use of offshore (normally tax haven or low tax jurisdiction) group companies;
- aggressive finance and group treasury arrangements;
- the placing of profitable business in low tax or tax exempt group companies;
- profit related royalties and transfer payments.
It remains to be seen whether the new rule is enacted in its current form. We would also expect further revised guidance from HMRC on its intended scope.
Once enacted, the new rule will have retrospective effect from 19 March 2014.