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HMRC proposes new measures to tackle HNWI tax avoidance

New measures to tackle tax avoidance by UK-resident high net worth individuals (HNWIs) who move profits offshore through the use of 'profit fragmentation' have been published for consultation by HM Revenue and Customs (HMRC).11 Apr 2018

It has proposed the introduction of a UK tax charge on "excessive" profits which have been moved offshore, usually by way of offshore trusts and companies which have "little or no substance". The new legislation, which it intends to introduce from April 2019, would have a similar effect to diverted profits tax (DPT) introduced in 2015 which applies to large multinational businesses, according to tax expert Jason Collins of Pinsent Masons, the law firm behind Out-Law.com.

"HMRC believes the current tools are not speedy enough - and wants legislation which will allow it to cut through more quickly," he said.

The proposal was first announced at the Budget in November. It would require taxpayers who enter into arrangements involving offshore structures that meet certain conditions to notify HMRC, which would then be able to issue an accelerated payment notice (APN) requiring payment of tax within 90 days with no right of appeal. The effect of this would be to "remove the cash flow advantage that would otherwise arise from using those arrangements", HMRC said in its consultation.

The notification requirement would apply where profits attributable to the "professional or trading skills" of a UK resident individual end up in an entity in a jurisdiction which results in "significantly less tax being paid on them than would have been paid had they arisen to" that individual. These conditions would be met by "a relatively small subset" of approximately 10,000 UK taxpayers, and are intended to ensure that "the amount of profit appropriate to UK business activity is taxable in the UK", according to the consultation.

While the consultation does not go into many details about the proposed legislation, it is likely that it would provisionally bring all offshore profits into account for UK tax where the conditions are met, Collins said. The taxpayer may, however, be able to settle on the basis of the conventional rules, leaving whatever profits are not considered to be 'excessive' by HMRC offshore, he said.

"The fact that the taxpayer would have to pay the provision charge upfront means he or she is likely to cut to the chase more quickly," he said.

"APNs are seen as heavy-handed. We argued that once they were introduced in one area HMRC would try to extend their use more widely, and that seems to be happening. The proposals leave taxpayers being faced with notices demanding the upfront payments of what could be hundreds of thousands of pounds, prior to any formal decision by the courts or tribunals," he said.

The consultation closes on 8 June 2018.