INTM600300 - Transfer of assets abroad: General conditions: Associated operations

The term ‘associated operation’ appears in the legislation in several places and in different contexts, but always in conjunction with a transfer of assets. For example, a transaction is only a relevant transaction if it is a relevant transfer or an associated operation (INTM600220).

The other contexts will be considered elsewhere in this manual at these pages:

INTM600340 Income becomes payable to person abroad

INTM600640 The power to enjoy income

INTM601480 The benefits charge

INTM602640 Exemptions from charge

Although there may be different contexts, ‘associated operation’ has a single meaning. The fact that the term is always found in conjunction with a transfer of assets underlines the relationship between them. This is clear from the definition which can be found at ITA07/S719.

An ‘associated operation’, in relation to a transfer of assets, is an operation of any kind effected by any person in relation to:

• any of the assets transferred,
• any assets directly or indirectly representing any of the assets transferred,
• the income arising from any assets within the two bullet points above,
• any assets directly or indirectly representing the accumulations of income arising from any assets within the first two bullet points above.

When considering whether an operation is an ‘associated operation’, each case must be considered on its own facts. However, there must be a connection between the transfer and ‘associated operation’ which causes the pre-conditions for the transfer of assets charge to be met.

In the case of Fynn v CIR (37 TC 629), an individual transferred investments to an overseas company in exchange for shares. He then settled the shares into a trust for the benefit of his children. The company used the shares as security for a bank overdraft facility which was used to make further investments. The individual subsequently lent the company £12,000 which was initially used to reduce the overdraft but was then used by the company to purchase further investments.

It was held on the facts of this case that there was no connection between the charging of the transferred assets to obtain the overdraft and the lending of the £12,000 by the individual or the right to receive payment thereof. Consequently, the loan was not an operation associated with the original transfer of the investments or the charge on them.

An operation effected by someone other than the transferor can be an associated operation as the legislation states it can be effected by any person. This is demonstrated in a number of tax cases.

Corbett’s Executrices v CIR (25 TC 305) involved the transfer of an interest in an estate to a UK resident company, which subsequently sold some of the investments transferred to a company resident overseas. It was held that the transfer to the overseas company was associated with the transfer to the UK resident company.

In Herdman v CIR (45 TC 394), it was held that, following a transfer to a company, the accumulation of income by that company and the management of the assets transferred were operations associated with the original transfer.

The Herdman case had wider implications for the application of associated operations when considering the exemption from charge under the transfer of assets provisions (INTM602600 onwards). In Mr Herdman’s case the courts found that, when considering liability under what is now ITA07/S720, the only associated operations relevant for the purpose of the exemption were those which brought ITA07/S720 into operation.

The transfer alone had caused income to become payable to an overseas company and had alone conferred the rights that gave Mr Herdman the power to enjoy that income. As the transfer itself had no purpose of avoiding UK income tax, the test for exemption was met and the court ruled that the later operations were irrelevant to the application of the test as they did not confer any additional rights on Mr Herdman.

The Finance Act 2006 recast the test for exemption in what is now ITA07/S736 - S742A for transfers and associated operations taking place on or after 5 December 2005. This reverses the effect of the decision in Herdman that, when considering claims for exemption, associated operations are in broad terms only taken into account in applying the purpose test if they involve avoidance and create either a new source of income, or a new power to enjoy income.

This change was enacted to counter arrangements where existing structures such as family trusts were transferred into avoidance vehicles with the associated operations being carefully designed so that they could not be said to create new sources of income or confer a new power to enjoy income. All associated operations with a tax avoidance purpose will be taken into account when considering claims to exemption. Further guidance on the exemption provisions can be found at INTM602600 onwards.

With effect from 5 December 2005, the words “It does not matter whether the operation is effected before, after or at the same time as the transfer” were added after the definition, making clearer that to be an associated operation the action does not have to chronologically follow a transfer of assets.

In the case of Fisher & Others v HMRC ([2014] UKFTT 804 (TC); [2020] UKUT 0062 (TCC); [2021] EWCA Civ 1438), the appellants transferred a telebetting business from the UK to Gibraltar. Later, using profits from that business, they set up new ventures in internet betting and an online casino. The First-tier Tribunal (FTT) concluded that the new ventures only got off the ground due to funding from the telebetting business and held that these additional transactions were associated operations, commenting:

If [the Gibraltar telebetting business] had been lent finance from elsewhere and used that to invest in the new businesses then we would accept the new business venture would not be in consequence (or only partly in consequence) of the transferred assets and to that extent it would fall out of charge.

The appellants subsequently set up a poker venture from a mixture of telebetting and internet/casino profits. After concluding that the setting up of the internet and casino ventures were associated operations, the FTT decided that the internet / casino income was also income arising from the transferred assets. The poker venture was found to be ‘in relation to’ the telebetting/internet/casino income. This decision was upheld at both the Upper Tribunal (at paragraphs [97]-[103] of their judgment) and the Court of Appeal (at paragraphs [116]-[120] of that Court’s judgment).

The same associated operations do not have to be taken into account in every context where it is necessary to consider ‘associated operations’. For example, a transfer together with an associated operation may result in income becoming payable to a person abroad, but it may be an entirely different associated operation in relation to a transfer that results in an individual having the power to enjoy that income.