CONTINUEThis site uses cookies. By continuing to browse this site you are agreeing to our use of cookies. Find out more.


HMRC To Add To Arsenal Against Diverted Profits

by Jason Gorringe,, London
12 April 2018

HM Revenue and Customs (HMRC) has launched a consultation inviting input on proposals to tackle arrangements entered into by individuals, partnerships, or companies that aim to move UK profits outside the scope of UK taxation, typically through the use of offshore trusts and companies.

The new legislation, to be drafted in summer 2018 and proposed to take effect in April 2019, would bring these profits within the UK tax charge and require notification of the arrangements to HMRC and earlier payment of tax. The Government intends that any changes should apply from April 1, 2019, onwards for corporation tax and April 6, 2019, for income tax and Class 4 national insurance contributions (NICs – the UK's social security levy), and will apply to all profits diverted on or after that date. It will apply to all arrangements in existence at that date, whenever the arrangements were entered into.

HMRC said: "The measure will apply only to businesses that have deliberately set out to reduce UK tax by allocating excess profits to an offshore entity from which they or someone connected with them can benefit. It will have no impact on businesses that pay all UK tax correctly due on their profits."

Current Law

The consultation notes that it is a general principle of UK taxation that a UK resident person (individual or company) is taxable in the UK on the full amount of profits from any trade or profession that they carry on, individually or with others, whether carried on in the UK or overseas. This applies unless one of the exemptions available for foreign profits applies (for example, the exemption for foreign permanent establishments or if the individual uses the remittance basis.)

A person who is not resident in the UK is taxable in the UK on any profits from a trade or profession carried on in the UK (and since 2016 on profits from trading or dealing in UK land even if that trade is not carried on in the UK).

According to HMRC, existing legislation, in particular the "transfer of assets abroad" legislation, can tackle many of these arrangements. Challenges are also possible under the rules relating to transfer pricing, disguised remuneration, and other legislation, it said. However, "this legislation can be difficult to apply as it requires the gathering of large amounts of information," HMRC explained, "and the users or promoters of the arrangements may seek to delay matters by arguing that HMRC has no right to force the production of relevant information held offshore."

"The amount of tax in dispute is normally substantial, but during the whole period of the inquiry, the user of the scheme benefits from cash flow advantages. Therefore, the Government believes that it would be preferable to introduce targeted legislation and to require the upfront payment of tax while the inquiries are undertaken," HMRC said.

"Some of the existing legislation which can be relevant to these arrangements, such as transfer pricing and Diverted Profits Tax, has specific exclusions for SMEs. The broad aim of any new legislation will be to target arrangements used by the types of business not covered by the existing rules," it said.


HMRC has put forward a two-part proposal. First, specific legislation would target arrangements with the following hallmarks:

  • There are profits attributable to the professional or trading skills of an individual (A) resident in the UK, whether A is trading as an individual or a partner, or conducting business through a company;
  • Some or all of those profits (alienated profits) end up in an entity Z which results in significantly less tax being paid on them than would have been paid had they arisen to A. An "entity" for these purposes would be interpreted widely, and would include a company, partnership, or trust, whether or not having legal personality; and
  • A, or a connected person, or someone acting together with A or the connected person, is able to enjoy economic benefits from the alienated profits.

These three conditions will be met by a relatively small subset of all UK businesses, HMRC said, adding there will be a final condition that is intended to give these businesses immediate certainty as to whether the legislation applies to them.

For the second part of the regime, legislation would be introduced to obligate taxpayers to notify the use of this type of arrangement, and to pay any tax relating to them at an early date. According to the consultation, if HMRC has reason to believe that an amount is chargeable under the new rules, HMRC will be able to issue a charging notice to the taxpayers stating that payment of the amount shown in that notice will be required within a fixed period – for example 30 days.

The consultation document discusses other key elements of the regime, including the "significantly less tax" condition, rules regarding excessive profits and substance, and on "connection rules" and a taxpayer's power to enjoy alienated profits.


Treaty Updates by Territory

Latest Treaty Updates

Austria - Japan

Austria's Federal Council on April 5, 2018, approved the DTA with Japan.

India - Kazakhstan

A protocol updating the DTA between India and Kazakhstan entered into force on March 12, 2018, and was published in India's Official Gazette on April 12, 2018.

Finland - Portugal

Finland is proposing to terminate its existing DTA with Portugal at the start of 2019, should Portugal fail to ratify a replacement DTA negotiated between the two states.

Spain - Finland

The Spanish Senate on April 11, 2018, approved a DTA with Finland.

Czech Republic - Kosovo

The Czech Senate on April 4, 2018, approved a law to ratify the DTA being negotiated with Kosovo.

Singapore - Bangladesh

Singapore on March 13, 2018, announced plans to update the DTA with Bangladesh signed in 1979.

Cambodia - Vietnam

Cambodia and Vietnam on April 5, 2018, signed a DTA.

India - Zambia

A DTA between India and Zambia was signed during a three-day visit Zambia ending April 12, 2018.

Kosovo - Saudi Arabia

Kosovo on April 4, 2018, approved negotiations towards a DTA with Saudi Arabia.

Australia - France

The Assistance in Recovery clause in the DTA between Australia and France entered into force on April 1, 2018.

Saudi Arabia - Hong Kong

The Saudi Cabinet on April 3, 2018, approved a DTA with Hong Kong.

Bangladesh - Azerbaijan

Bangladesh and Azerbaijan on April 6 agreed to speed up negotiations towards a DTA.

Korea, South - Vietnam

South Korea and Vietnam on March 25 agreed to work towards amending their DTA.

Morocco - Bangladesh

The Moroccan upper house of parliament on April 5 passed draft Law No. 22.18, endorsing a DTA signed with Bangladesh.

Hungary - Ecuador

At a March 15 meeting, representatives from Hungary and Ecuador discussed engaging in talks towards the conclusion of a DTA, Hungary's Ministry of Finance reported on March 21, 2018.

Nigeria - Singapore

On March 21, 2018, Nigeria completed its domestic ratification procedures in respect of the DTA signed with Singapore.

Kazakhstan - Belarus

Kazakhstan's Senate on March 29, 2018, approved a law to ratify the DTA signed with Belarus.

Kenya - Mozambique

During a meeting on March 29, 2018, representatives from Kenya and Mozambique agreed the two countries should agree a DTA.

Georgia - Saudi Arabia

Georgia and Saudi Arabia signed a DTA on March 14, 2018.

Turkmenistan - United Arab Emirates

Turkmenistan and the United Arab Emirates signed a DTA Protocol on March 15, 2018.

India - Hong Kong

India and Hong Kong signed a DTA on March 19, 2018.

France - Luxembourg

France and Luxembourg signed a DTA on March 20, 2018.

Netherlands - Malawi

The Dutch lower house of parliament on March 15, 2018, approved a DTA signed with Malawi.

Liechtenstein - United States

Liechtenstein and the United States are newly engaged in negotiations towards a DTA.

Armenia - Denmark

Armenia and Denmark signed a DTA on March 14, 2018.

More Treaty Updates