They will have effect for profits arising on or after 1 April 2019 for corporation tax and 6 April 2019 for income tax and Class 4 National Insurance contributions, and will apply to all profits diverted on or after that date.

The rules, which are likely to affect around 10,000 high net worth individuals, are included in draft legislation for the draft Finance Bill 2018/19 and are designed to prevent UK traders and professionals from arranging for their UK-taxable business profits to accrue to entities resident in territories where significantly lower tax is paid. 

The legislation will apply when certain conditions are present.

There must be a transfer of value from the UK trader to an offshore entity, for example a diversion of income to the offshore entity, or payment of expenses to the offshore entity.

The effect of the arrangement must be that a significantly lower level of tax is paid on the profits than would be the case if they were correctly taxed in the UK in accordance with the current law.

The proprietor of the business, whether a sole trader or partner in an unincorporated business, or as director and/or shareholder of a company, must be able to enjoy the profits that have been diverted.

The UK person must have arranged for the profits to be diverted to the offshore entity.

The diversion or payments are not commensurate with the work undertaken by the offshore entity.

Where these conditions are present the arrangement is to be counteracted by bringing the profits back into UK tax by attributing the correct amount of profits to the UK-taxable source.  

Individuals will be required to notify HMRC on their tax return if the first four conditions apply to their arrangements but they have not made the necessary adjustments to profits. Notification will be required on or before the time that the relevant person is required to submit their tax return for the relevant period.

There was a two-month consultation on the new regime earlier this year, which saw respondents raise particular concerns about the proposals for advance payment of tax following a notification.

These included the concern that there could be considerable uncertainty about the amount to be charged, which would in effect require almost a full enquiry process to establish the correct position. Respondents were also concerned that given the breadth of the notification rules, compliant businesses could face an early payment requirement in cases where it would be unlikely that there would be additional tax to pay. In addition, they pointed out that some taxpayers may not be able to pay if they do not have access or the right to the funds of the trust, while the proposed 30-day period for taxpayers to make submissions against preliminary notices was fairly short.

In response, the government has said it has decided to postpone this part of the proposal. HMRC will now monitor compliance with these rules and will keep the requirement for an early payment rule under review.

The Treasury has not released its analysis of the likely impact on the Exchequer of the new measure.

Profit fragmentation is here.

Report by Pat Sweet