INTM600700 - Transfer of assets abroad: The income charge: General conditions - legislative purpose

Although there is no explicit condition to be met that tax avoidance must be involved before an income charge can arise, this legislation was introduced as an ‘anti-avoidance’ measure (INTM600120) and the preamble to the charging provisions sets out the purpose for which the provisions apply: preventing the avoiding of liability to income tax by individuals who are UK resident by means of relevant transfers.

However, the preamble also has important direct links to the income charge. For example, in the pre-ITA 2007 legislation each income charge provision referred to ‘such transfer’, being a transfer of a type described in the preamble that has now effectively become a reference to ‘relevant transfer’ in the preamble to the ITA 2007 provisions. Also, both before and after ITA 2007, the income charges make reference to ‘such an individual’ being an individual of the kind described by the preamble. More is said about ‘such an individual’ in INTM600760.

The preamble sets out the purpose of the legislation, as Lord Browne-Wilkinson says in the McGuckian case (69 TC 1 at page 76),

…the words quoted [from ICTA88/739(1)] refer not to the intention of the transferor of the assets … but to the intention of Parliament in enacting the section

and in the same case Lord Clyde (at page 85) affirms that,

The opening few lines of that section set out the purpose to be served by the enactment. That purpose is the prevention of avoidance by individuals ordinarily resident in the United Kingdom of liability to income tax by means of certain kinds of transaction,

because of the links to the income charges it does much more, forming an integral part in construing the section as Lord-Browne Wilkinson goes on to say,

That Parliamentary intention is certainly relevant in construing the section.

However, it should not be thought that these provisions are only aimed at transactions whose purpose is avoiding income tax. The first bullet of INTM600620 makes clear that it does not matter whether the avoiding of liability to income tax is a purpose for which the transfer is effected. Clarification to this effect was first inserted into the legislation in Finance Act 1997 and applying irrespective of when the transfer or associated operations took place but only in relation to income arising on or after 26 November 1996.

The Budget Press Release in relation to the amendment introduced in Finance Act 1997 records:

The existing provisions which prevent individuals ordinarily resident in the United Kingdom avoiding income tax by the transfer of assets abroad will be amended to clarify their application and ensure that they work effectively. The changes will confirm long-standing practice in this area. The amendments will ensure that, for income arising on or after today, the legislation applies: where a purpose of the transfer is to avoid any form of direct taxation. The new measure will have the effect of removing any possible implication in the legislation that the provisions only apply if: the avoiding of income tax is the purpose, or one of the purposes, for which the transfer is effected.

The provision appears to reflect exactly the sentiments of Lord Clyde in McGuckian expressed in his judgement in June 1997 where he says, continuing on from the quotation above,

It is not required that the transaction should be carried out with that purpose.

Further affirmation of the nature of these introductory words can be gleaned from the speech of Lord Steyn in the McGuckian case, at page 82, where he comments,

I would reject the argument that it is a condition precedent to [the ToAA provisions] applying that there must be proof of actual avoidance of tax liability. Such a construction treats [the provisions] as a power of last resort and it substantially emasculates the effectiveness of the power under [these provisions]. Nothing in the language or purpose of [the section] compels such a construction. Properly construed the opening words of [the section] merely provide that there must be an intention to avoid liability for tax. The sensible construction is that [the section] can be applied even if there are other provisions which could be invoked to prevent the avoidance of tax. That the revenue authorities should have overlapping taxation powers is an unremarkable consequence. And such a construction cannot cause any unfairness to the taxpayer since he cannot be taxed twice in respect of the same income.

Therefore, the preamble not only establishes the purpose of the legislation but is also used in identifying the individual who is subject to the charge (INTM600760) and the transactions which are the target of the legislation (INTM600200).

Whether there needs to be an actual avoidance of income tax was considered in the case of Fisher and Others v HMRC. This case involved a transfer of a UK telebetting business to Gibraltar. The reason for the transfer was to save the business by avoiding liability to UK betting duty. The appellants argued that the ToAA code had no application as there was no avoidance of income tax. The First-Tier Tribunal ([2014] UKFTT 804 (TC)), Upper Tribunal ([2020] UKUT 0062 (TCC)) and the Court of Appeal ([2021] EWCA Civ 1438) all held in favour of HMRC, concluding that income tax does not have to be avoided as a pre-condition for the ToAA provisions to apply. In the Court of Appeal, Lord Justice Newey stated, at paragraph [76] of the judgment:

[The ToAA code] nowhere states that income tax must in fact have been avoided and, had that been Parliament’s intention, it could be expected to have spelled out what was required. It is apparent from [the ToAA code] that the legislation is aimed at preventing avoidance of income tax, but it simply does not follow that the section can be in point only where the tax has been avoided.