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13.5. Other Anti-Avoidance Rules

Targeted Anti-Avoidance Rules (“TAAR”)

The UK has approximately 300 TAAR provisions, which mostly relate to financial matters such as manufactured dividends, dividend stripping, transfer of profits within the group, the cancellation of tax advantages on transactions in securities, sale by individuals derived from personal activities and artificial transactions in land.

DOTAS

Under the Disclosure of Tax Avoidance Scheme (“DOTAS”) regime, HMRC must be notified of certain tax planning and structuring transactions.  It is the responsibility of the scheme promoter to notify HMRC within five working days of the scheme being implemented, or in some circumstances, making contact with the client to market the arrangement.  HMRC then issues a reference number which the client must then disclose in the annual tax return together with an indication of the expected tax advantage which will be obtained.

As this is not an advance clearance or approval process, HMRC is not required to respond to the report, but rather may use this information to introduce new legislation to block the arrangements reported.  

This is a reporting system which covers most taxes, including income tax, corporation tax and capital gains tax.  There are minor adaptations for other taxes such as stamp duties and ATED, and there are hallmarks which determine whether disclosure is required.  

On 17 October 2016, the HMRC published updated guidance on the DOTAS. The guidance is available at https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/560047/dotas-guidance.pdf.

Taxpayers a DOTAS referenced number in their returns may be subject to an accelerated tax payment obligation (see Sec. 14.2.)

Promoters Tax Avoidance Scheme (POTAS)

The objectives of the POTAS regime is change the behavior of promoters of avoidance schemes , and to aim to deter the development and use of avoidance schemes by influencing the behavior of promoters, their intermediaries and clients. The regime aims to achieve its objectives by:

  • requiring monitored promoters to disclose details of their products and clients to HMRC
  • ensuring monitored promoters tell clients, potential clients and intermediaries that they are a monitored promoter
  • minimising the risk of tax loss via avoidance schemes developed by POTAS
  • making sure that clients and intermediaries are fully aware of the risks of engaging in avoidance schemes.

An exemption for a company from being considered a promoter of tax avoidance schemes when the promoter is part of the same group as the company to whom services relating to tax avoidance schemes are provided. Conditions includes that the promoter has not provided such services to any person outside of the group in the past three years, and does not subsequently provide such services to any person outside of the group.

The HMRC has issued an updated guidance on POTAS as of 2014, which is available at: https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/454865/POTAS.pdf

Hybrid Mismatches

In line with BEPS Action Plan 2, government announced new rules for hybrid mismatches. The rules apply to several hybrid mismatch types, including hybrid and other mismatches from financial Instruments, hybrid transfer mismatches, hybrid payer mismatches, hybrid payee mismatches, and others. Although specific rules apply for each mismatch type, the primary response in general is the disallowance of a deduction in the case of a UK payer and the inclusion as ordinary income in the case of a UK payee where the other jurisdiction has not disallowed a deduction.

The rules include a targeted anti-avoidance rule (TAAR) to counteract arrangements where:

  • The main purpose, or one of the main purposes, of those arrangements is to enable any person to obtain a tax advantage by avoiding the hybrid and other mismatches rules, or any overseas equivalent; and
  • If the TAAR did not apply, the arrangements would achieve that purpose.

In the event the TAAR counteracts such arrangements, an adjustment may be made by means of assessment, modification of an assessment, amendment, disallowance of a claim, or other adjustment as provided for by the TAAR.

The rules will apply for hybrid payments made on or after 1 January 2017 involving hybrid entities or instruments that give rise to hybrid mismatch outcomes, including:

  • Deduction/non-inclusion mismatches arising from payments made on or after that date;
  • Deduction/non-inclusion mismatches arising from quasi-payments in a payment period beginning on or after that date;
  • Double deduction mismatches for accounting periods beginning on or after that date;
  • Imported mismatch payments arising from payments made on or after that date; and
  • Imported mismatch payments arising from quasi-payments in a payment period beginning on or after that date.

For payment periods and accounting periods that begin before 1 January 2017 and end after that date, transitional rules apply where the payment/accounting period is treated as two separate taxable periods with one ending on 31 December 2016, and the other beginning on 1 January 2017. The amounts are apportioned to each of these periods on a time basis, unless it produces a result that is unjust or unreasonable, in which case the amounts are apportioned on a just and reasonable basis.

The updated guidance as on March 2017 issued by the HMRC is available at: https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/605052/Hybrid_and_Other_Mismatches_-_updated_draft_guidance__March_2017_.pdf

Worldwide Disclosure Facility

Keeping up with the country’s commitment to exchange information on a multilateral basis under the OECD Common Reporting Standard (CRS), the worldwide disclosure facility was opened on 5 September 2016 to allow taxpayers to come forward and disclose a UK tax liability that relates wholly or in part to an offshore issue. The facility will be open until 30 September 2018, after which new penalties under the Requirement to Correct obligation will apply.

An offshore issue includes unpaid or omitted tax relating to:

  • income arising from a source in a territory outside the UK
  • assets situated or held in a territory outside the UK
  • activities carried on wholly or mainly in a territory outside the UK
  • anything having effect as if it were income, assets or activities of a kind described above

It also includes funds connected to unpaid or omitted UK tax not included above, that the taxpayer has transferred to a territory outside the UK or are owned in a territory outside the UK.

Large Business Tax Strategy

A company, partnership, group or sub-group is required to publish their tax strategy if in the previous year:

  • Turnover exceeds GBP 200 million; or
  • Balance sheet total exceeds GBP 2 billion.

For groups and sub-groups, the combined totals of all the relevant bodies are considered. Although separate from Country-by-Country reporting requirements, UK companies not meeting the above thresholds may still be required to publish the tax strategy if their group meets the EUR 750 million revenue threshold. Open-ended investment companies and investment trusts are not required to publish their tax strategy.

The information in the tax strategy should include:

  • An explanation of tax arrangements;
  • How tax risks are managed;
  • The attitude towards tax planning;
  • The approach to working with HMRC; and
  • Any other relevant information.

The tax strategy does not need to include amounts of tax paid or commercially sensitive information. When required, the tax strategy must be published online and be accessible to the public free of charge. Penalties apply in case of non-compliance.

Diverted Profits Tax (DPT)

The Diverted Profits Tax (DPT) is a new and controversial tool to be used by the HMRC to counter profit shifting.

DPT applies to profits arising from 1 April 2015 and is focused on contrived arrangements designed to erode the UK tax base. Its primary aim is to ensure that the profits taxed in the UK fully reflect the economic activity there. Specifically DPT aims to deter and counteract the diversion of profits from the UK by large groups that either:

(i) seek to avoid creating a UK permanent establishment that would bring a foreign company into the charge to UK Corporation Tax, or

(ii) use arrangements or entities which lack economic substance to exploit tax mismatches either through expenditure or the diversion of income within the group.

DPT is set at a higher rate than corporation tax to encourage those businesses with arrangements within the scope of DPT to change those arrangements and pay corporation tax on profits in line with economic activity:

  • The normal rate of DPT is 25% of the diverted profits plus any “true-up interest”
  • When taxable diverted profits are ring-fence profits or notional ring-fence profits in the oil sector, DPT is charged at a rate of 55% plus true-up interest
  • Finance (No.2) Act 2015 introduced a surcharge of 8% on the taxable profits of banking companies arising on or after 1 January 2016. There are consequential amendments to the DPT legislation to apply DPT at a rate of 33% in cases where taxable diverted profits would have been subject to the surcharge

Affected Taxpayers

DPT is aimed at large groups (typically multi-national enterprises) that use contrived arrangements to circumvent rules on permanent establishment and transfer pricing.

DPT addresses the following three situations:

  • a UK company uses entities or transactions that lack economic substance to exploit tax mismatches;
  • a foreign company with a UK-taxable presence (a permanent establishment) uses entities or transactions that lack economic substance to exploit tax mismatches; or
  • a person carries on activity in the UK in connection with the supply of goods, services or other property by a foreign company and that activity is designed to ensure that the foreign company does not create a permanent establishment in the UK, and either the main purpose or one of the main purposes of the arrangements put in place is to avoid UK tax, or there are arrangements designed to secure a tax mismatch, such that the total tax derived from UK activities is significantly reduced.

Although in many cases the arrangements put in place to divert profits will involve non-UK companies, DPT may also apply in circumstances where wholly domestic structures are used if a UK tax reduction is secured.

The legislation contains some specific exemptions, including for small and medium-sized companies (SMEs), companies with limited UK sales or expenses, and where arrangements give rise to loan relationships only.

DPT addresses the erosion of the UK tax base by the diversion of profits that have been generated by UK economic activity. Profits which have been diverted from the UK are computed using the same principles which apply for corporation tax, including transfer pricing rules, except where the legislation requires them to be calculated by reference to the arrangements that it is just and reasonable to assume would have been made if tax on income had not been a consideration.

Procedures

As a tax in its own right, not corporation tax, DPT has its own rules for notification, assessment and payment.

DPT is not self-assessed but companies are required to notify HMRC within 3 months of the end of an accounting period in which they are potentially within the scope of the tax and do not meet certain conditions for exemption. There is a tax-geared penalty for failure to do so. For accounting periods ending on or before 31 March 2016, the notification period is extended to 6 months.

DPT is brought into charge by a designated HMRC officer issuing a charging notice. There are a number of safeguards which provide companies with opportunities to demonstrate that they are not subject to DPT before a charging notice is issued. However, once a tax charge is raised, it must be paid within 30 days of the issue of the notice and payment may not be postponed on any grounds, whether or not the charge is 6 subject to review or appeal (i.e. DPT regime requires taxpayers to pay the tax “up front”, even if the taxpayer intends to appeal the assessment). Further tax may become payable by virtue of a supplementary charging notice. If a non-UK resident does not pay the tax due, it may be collected from a related party.

Practical Notes

Most recently, the HMRC showed their willingness to apply this controversial regime by announcing the intent to issue preliminary notice of assessment to a popular drinks brand owner Diageo. The amount of additional tax and interest assessed under the DPT regime is to be approximately GBP 107 million in the aggregate for the financial years ended 30 June 2015 and 30 June 2016.

The language of DPT regulations is deliberately designed to be ambiguous, allowing the HMRC to investigate a wide range of tax avoidance cases. Therefore it would be wise for a prudent taxpayer to familiarize the latest news regarding DPT enforcement and plan ahead accordingly.