INTM600825 - Transfer of assets abroad: The income charge: Transfers made by closely-held companies - introduction
Before the Supreme Court decision in Fisher ([2023] UKSC 44), it was HMRC's understanding that a transfer by a company to a person abroad could, in certain circumstances, be treated as being procured by an individual for the purposes of the ToAA legislation (see INTM600820). However, the Supreme Court decided that a transfer by a company could not be procured by an individual unless the arrangements were contrived. In response to the Supreme Court decision, new legislation enacted in section 22 of Finance (No.2) Act 2024 will have effect in relation to income arising to a person abroad from 6 April 2024 as a result of transfers undertaken by closely-held companies (see INTM600830). The legislation will apply regardless of whether the transfer took place before or after 6 April 2024.
The aim of the new measure is to reverse the Supreme Court decision, bringing into the scope of the income charges relevant transfers made by closely-held companies for those individuals who have a ‘qualifying interest’ in those companies (see INTM600830).
The Supreme Court was concerned that the ToAA legislation was unclear about when it could determine an individual had procured a transfer by a company (see INTM600820). This is because the legislation refers to individuals having made a transfer, meaning it was not enough to pierce the corporate veil and impute transfers made by companies to its individual shareholders.
At paragraph [73] of the judgment, the Supreme Court stated:
Section 739 is expressly limited to “individuals”. The absence of any definition of what it means for an individual to control a company in order to be the transferor of assets transferred by that company suggests strongly to me that section 739 was not intended to apply to transfers by companies.
This was not how HMRC understood the legislation to work as it would make it too easy for individuals to hide behind transfers made by companies in relation to decisions and actions taken by individuals. This is because, in certain situations, the reality is that individuals can control the actions of a company they hold shares in, such as those companies with sole shareholders or a very small number of shareholders. When a company transfers an asset that was previously owned by an individual, depending on the specific facts, HMRC may be able to point to the relevant transfer as having been made by that individual with any subsequent transactions undertaken by the company as being associated operations. However, when a company transfers a valuable asset – not previously owned by an individual - to a person abroad, such as a long-standing business/trade, or enters into a contract to exploit the use of an asset created by a UK company, HMRC are no longer able to argue that these transfers were procured by the individual(s) who made the decisions in relation to those transfers.
Another concern raised by the Supreme Court was that, if it were intended that the legislation was to include transfers made by companies, then it would be difficult for shareholders who were not involved in the transfer or had any avoidance purpose to relieve themselves from a charge. This is because the exemptions at ITA07/S736-S740 take into account the purpose of the relevant transactions rather than the purpose of the individual.
Lady Rose commented at paragraph [83] of the judgment:
One might have thought that the existence of the motive defence in section 741 ICTA 1988 would serve to distinguish between active, knowledgeable shareholders who should be treated as quasi-transferors procuring the company to transfer its assets and passive shareholders who do not know anything about the transfer or do not agree with it. The latter would not have a tax avoidance purpose. That is not the case since it was accepted by both parties that the motive defence in section 741 focuses on the purpose for which the transfer was effected not the purpose of each individual whom HMRC seek to charge to tax.
Following the Supreme Court's decision, changes were made to the ToAA legislation. New sections were introduced at ITA07/S720A and ITA07/S727A to provide clarity to individuals as to when and how ToAA would apply to them in respect of transfers made by companies they have an interest in and to give individuals the opportunity to exempt themselves from a ToAA charge in respect of transfers made by such companies.
The aim of the changes was to ensure those individuals who are involved in the company decisions and were aware of the consequences of those transfers were to be caught, whereas those individuals who were not involved or were unaware should not be caught. The changes introduce two conditions for an income charge to apply to an individual in these cases.
ITA07/S720A(2) and ITA07/S727A(2) set out when a charge will apply to an individual in respect of transfers made by closely-held companies. A charge will only apply if
- the individual is involved in the company (INTM600835), and
- the avoidance condition is met (INTM600845).
Where both conditions are met, income is treated as arising to the individual with the qualifying interest under ITA07/S721/S728 in respect of relevant transfers made by the closely-held company. The income treated as arising is then charged to tax under ITA07/S720/S727 (see INTM600520).
The following pages of guidance set out how HMRC intend the legislation to work in practice and further expand on some definitions used within the legislation.