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Transfer of assets abroad and corporation tax

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The CIOT has written to HMRC seeking clarity on a question of statutory construction that has intrigued private client tax advisers since 6 April 2020. It concerns the interaction of the Transfer of Assets Abroad (ToAA) code in ITA 2007 and the charge to corporation tax now imposed under CTA 2009 s 5 on UK source rental income of non-resident companies.

If a non-resident company has a UK-resident shareholder or if it is owned by an offshore trust with a UK-resident settlor, the company’s income could fall to be taxed on that person as a transferor under the ToAA regime, as well as having suffered corporation tax.

It seems likely that the answer to this risk of double taxation is that there is no income tax charge because of CTA 2009 s 3(1). This provides that ‘the provisions of the Income Tax Acts relating to the charge to income tax do not apply to income of a company if ... the company is not UK resident and is chargeable to corporation tax in respect of the income’. That should mean that the transfer of assets abroad code (being a set of provisions of the Income Tax Acts) does not apply to income of a non-resident company to the extent that company is subject to corporation tax. James Kessler KC in Taxation of Non-residents and Foreign Domiciliaries (at para 51.3.5) describes this as ‘the better technical argument’.

The CIOT points out (see bit.ly/TOAAandCT), however, that some practitioners fear that s 3 deals only with the position of the company, and not with the position of a transferor. Ordinarily, where income is subject to UK income tax outside the ToAA regime, ITA 2007 s 745 relieves the liability of the transferor to basic rate income tax. Strictly, however, ITA 2007 s 745 does not similarly provide relief by reference to the payment of corporation tax. In R v Dimsey [2001] UKHL 46, Lord Scott commented that he would ‘be attracted by the view’ that the payment of corporation tax should result in a deduction of the corporation tax paid for the purposes of the ToAA income calculation. That is, a credit should be available rather than there being simply no charge under the ToAA regime. This would create not only a different fiscal effect but would also impose a filing obligation on transferors. The comment was obiter (not binding) in Dimsey and, in any event, the CTA 2009 s 3 point had not been argued. The question was apparently raised in Levy v HMRC 56 TC 68 (by reference to the income tax settlement provisions, rather than the transfer of assets abroad code) but the taxpayer won for other reasons and the judgment does not address CTA 2009 s 3.

The best argument against the application of s 3 is probably that the ToAA code does not charge income tax on the income of the company but on an amount of deemed income distinct from but equivalent to the income of the company. Similar arguments have succeeded in treaty relief cases. But here, the wording of s 3 should be wide enough to disapply the entirety of the ITA 2007 provisions, which create the deemed income as well as charging it to tax.

At present, HMRC do not seek full double tax but they only offer a credit for corporation tax paid (see Helpsheet 262 and HMRC’s International Manual at INTM601280). This means that taxpayers relying on the application of CTA 2009 s 3 should make full disclosure on their personal tax returns. The CIOT is right that this should be rendered unnecessary if HMRC can be prevailed upon to provide definitive guidance, which properly addresses the law.

Issue: 1651
Categories: In brief
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