Profit fragmentation: another weapon in HMRC's armoury

HMRC is proposing to introduce more legislation to target arrangements where UK business profits accrue to entities resident in territories where no tax, or only a low rate of tax, is paid.  

What's interesting is that these proposals come despite the volume of legislation already at HMRC’s disposal that can tackle profit fragmentation arrangements.  Disguised investment management fee rules (DIMF Rules), transfer of assets abroad rules, transfer pricing rules and the general anti-abuse rule guidance (GAAR) are all likely to bite in the scenarios HMRC is attempting to tackle.

Not only does HMRC state in the consultation document that the existing measures “can be difficult to apply as it requires the gathering of large amounts of information, 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”, they also state that they want to strip the financial cash-flow benefit from some of these schemes.

The introduction of legislation with taxpayer notification and an advance tax payment regime not only highlights HMRC’s resolve to shift the burden to taxpayers but is indicative of the resourcing pressures HMRC is under. In 2005 there was some 90,000 full-time staff, whereas today there is just over 58,000.  

The consultation paper makes clear that the Government has no desire to affect genuine commercial arrangements with this legislation. It will be important to monitor the development of this initiative to ensure fund managers operating through non-UK corporate structures with genuine activities are not inadvertently caught.