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Transfer of corporate profits – update

04 August 2014. Published by Ben Roberts, Partner

Earlier in the year I posted a blog on the proposed new anti-avoidance measure, targeted at so-called "profit transfers" from one group company to another.

New section 1305A of the Corporation Tax Act 2009, inserted by the Finance Act 2014 which received Royal Assent on 17 July, is now in force and has retrospective effect in respect of payments made on or after 19 March 2014.

The text of section 1305A has not been amended.  As a reminder, the new measure applies where:

  • two companies (A and B) are part of the same "group";
  • A and B are party to "arrangements"
  • the arrangements result, in substance, in A (directly or indirectly) making a payment to B of "all or a significant part" of A's profits (the profit transfer); and
  • one of the main purposes of the arrangements is to secure a "tax advantage".

If the new measure applies, A's profits are recalculated for corporation tax purposes as though the profit transfer had not taken place.

On 24 July HMRC published revised guidance on the new measure.

Revised HMRC guidance

The revised guidance considers certain particular situations in greater detail and includes a number of further examples setting out HMRC's views as to when the new measure is, and is not, likely to apply.

As far as reinsurance is concerned, HMRC's published view is that intra-group reinsurance would "not normally" be caught by section 1305A. This was included in the original guidance published in March 2014. The revised guidance goes further so that, in HMRC's view:

  • the rule will only apply where the "normal commercial motives" for reinsuring are absent;
  • a payment of premium to a reinsurer would "not normally" be considered a profit transfer;
  • tax planning in choosing a location for an intra-group reinsurer will not, of itself, mean that section 1305A is activated.

More generally, the updated guidance seeks to draw out a distinction between:

  1. payments which essentially (for tax reasons) divert a pure income profit payment to another group company (caught by the rule); and
  2. payments incurred in earning profits, on commercial terms, which need to be deducted in determining profits (not caught).

As an example of the second type of payment, the revised guidance refers to services provided by a non-UK group company to a related UK, intangible asset-holding, company, where the services enhance the UK intangible assets.  If the non-UK company is awarded a percentage of the profit arising from the UK intangible assets, this is not caught by the rules. The payment is correctly, in HMRC's view, characterised as an expense incurred in arriving at the UK taxable profits.

Despite the new guidance, and the reassurance it may provide in certain cases, taxpayers are still advised to review their intra-group tax planning arrangements so as to be certain that payments under such arrangements are genuinely incurred on commercial terms, and do not amount to a tax-motivated diversion of profit.

As a general comment, although the revised guidance is welcome, it is far from ideal to see widely-drafted legislation limited by guidance in this way.