INTM600800 - Transfer of assets abroad: The income charge: The individual - multiple income charges

In circumstances where there is a choice of persons who can be considered to be the transferors in charging the income, then the income is apportioned on a ‘just and reasonable’ basis between them as referred to in ITA07/S743(2).

This has not always been the position.

In CIR v Pratt (57 TC 1), the three respondents owned 29% of a company’s share capital between them. There were 15 other shareholders and 5 other directors. An avoidance scheme was established which included a number of offshore companies and two offshore trusts: one of which was a family discretionary trust. Each of the respondents received £2,000 and was assessed to tax under what was ITA52/S412 (now ITA07/S720). Walton J dismissed the Revenue’s appeal on the grounds that it was not possible to do otherwise in this case, as there was a plurality of transferors whose respective interest could not be separated out.

He accepted that in the House of Lords’ decision in the case of Vestey v IRC (3WLR 915) what is now ITA07/S720 could only lead to a charge to tax on the transferor, but that an individual could come within the charge if they ‘procured’ the transfer. He also accepted that there could be multiple quasi-transferors, but only to the extent that an identifiable portion of the asset transferred could be attributed to a particular transferor. In the absence of such identifiable portions ITA52/S412 did not provide any means to arrive at an apportionment, or the authority to tax it, and in the absence of any legal basis for such action the section could not apply.

FA81/S45 was enacted to provide for the apportionment of income.

HMRC’s practice where the same assets are transferred by several individuals is to assess the transferors in proportion to their shares of the assets transferred. For example, where shares of a UK company are held by three individuals in the proportions of 40%, 40% and 20%, and there is a liability under ITA07/S720 in respect of an overseas person to which the shares are transferred, the liability is assessed on each of the three individuals in proportion to their respective holdings.

Following the introduction of FA81/S45, the issue was considered in the case of Commissioners of HMRC v Peter Fisher and Others ([2021] EWCA Civ 1438) which involved the transfer of a tele-betting business which was found to be procured by multiple transferors. The relevant ToAA section being referred to in this case was ICTA88/S744 which is not identical to ITA07/S743. In the Fisher case, it was said that the reason ICTA88/S744 was enacted was to cover this very situation whereby the income of a person abroad could be apportioned in recognition of the relevant interests of multiple transferors. The Court of Appeal commented at paragraph [69] of their judgment:

The [Upper Tribunal] noted that section 744 could apply where the same income could be the subject of charges under both [the ToAA income charge] and [the ToAA benefits charge], but, whether or not the proponents of what has become section 744 had that sort of overlap in mind, it is reasonable to assume that the provision was (also) intended to address the position of multiple transferors (and quasi-transferors).

An officer of HMRC must be satisfied, based on the facts of the case, that the apportionment of income to be taken into account between individuals is on a ‘just and reasonable’ basis (ITA07/S743(2)). Of course, taxpayers have the usual rights of appeal against decisions on this point, which are the jurisdiction of the Tax Tribunal (ITA07/S751).

Where we have multiple individuals that meet the conditions set out in ITA07/S720A/S727A (see INTM600825) in respect of relevant transfers made by closely-held companies, any income treated as arising to the individual will be in proportion to their qualifying interest (see INTM600830) in that company. HMRC’s interpretation of ITA07/S716 allows for this. It refers to income becoming payable to a person abroad as a result of a relevant transfer (or one or more associated operations, or the transfer and one or more associated operations). When we consider a relevant transfer made by a closely-held company with more than one individual with a qualifying interest, no one individual has a 100% interest in the asset transferred. HMRC’s view is therefore that income has become payable to a person abroad in proportion to each individual's shareholding and each shareholder has made a relevant transfer of a proportion of the asset transferred by the company in their own right.

Where we have a mix of shareholders in a closely-held company with some meeting the conditions in ITA07/S720A/S727A and some not meeting the conditions, income will have still become payable to a person abroad as a result of a relevant transfer regardless of the individuals’ chargeability. The effect of those not meeting ITA07/S720A or ITA07/S727A is that this income is not treated as arising to them under ITA07/S721, the amount being in proportion to their shareholding.

Using an example: Elaine and Aidan are equal shareholders in X Ltd. The company transfers its business to Y Ltd. In the case of both meeting the conditions set out in ITA07/S720A, the income arising to Y Ltd is treated as arising to them under ITA07/S721. Income has arisen to Y Ltd as a result of the transfer of the business in which each individual has a 50% interest and so HMRC would view each individual as having made a relevant transfer each in their own right in proportion with their shareholding in X Ltd.

Using the same facts above, let’s say Aidan doesn’t meet the conditions set out in ITA07/S720A. In that case, there still will have been a relevant transfer and income has still arisen to Y Ltd, however the difference now for Aidan is that income will not be treated as arising to him under ITA07/S721 (by virtue of ITA07/S720A not being met) and no tax charge arises on him in respect of the proportion of his interest transferred. As we would view each individual as having made a relevant transfer in their own right, we would not charge Elaine on Aidan’s proportion transferred as it was not part of her interest to transfer.