INTM600835 - Transfer of assets abroad: The income charge: Transfers made by closely-held companies - the involvement condition

ITA07/S720A and ITA07/S727A introduce two conditions at ITA07/S720A(2) and ITA07/S727(2) for an individual to be within the scope of ITA07/S720 and ITA07/S727 in respect of transfers made by closely-held companies.

The first condition is that the individual must be involved in the company. Strictly-speaking, it is not named ‘the involvement condition’ but we will refer to it this way for the purposes of this guidance.

The second condition is the avoidance condition which is considered further in INTM600845.

This page of the guidance will consider only the involvement condition.

ITA07/S720A(4) and ITA07/S727A(4) set out when an individual is treated as being involved in a company. Where an individual has a qualifying interest in a company (see INTM600830), they are treated as being involved in the company. If an individual with a qualifying interest is of the view they do not meet the involvement condition, the individual will need to satisfy HMRC of the fact.

In terms of ‘involvement’, the individual must satisfy HMRC that neither they, nor a relevant participator, has any direct or indirect involvement in the decision making of the company. A relevant participator as set out in ITA07/S720A(6) and ITA07/S727A(6) means:

  • any nominee of an individual with a qualifying interest who is a participator in the company, or
  • if not the nominee, then the individual.

Whether an individual has a direct or indirect involvement with the decision making of the company will be a question of fact. For example, there may be an individual who has day-to-day involvement in the company’s decisions but is not involved in the relevant transfer itself. We would consider the involvement condition met here as the individual clearly is involved in the company decision making.

If, on the other hand, the individual is a completely passive shareholder and does not attend meetings or vote, then it is likely that the involvement condition would not be met. However, we would look at facts such as

  • frequency of any board meetings
  • whether the individual attended those board meetings and how often
  • the level of input to those board meetings made by the individual
  • other surrounding details of decisions made contained within documents such as emails or letters.

Where a shareholder has no day-to-day involvement in the business but has had an input or vote into strategic company decisions, we would likely treat the individual as being involved. However, when determining whether an individual is involved or not, officers should be reasonable in considering circumstances such as whether an individual has made a one-off decision completely unrelated to the transfer or a decision that occurred a long time ago. In the case of an individual who has trivial involvement such as simply signing off accounts, they would likely not meet the condition.

When considering indirect involvement, we would include those individuals acting on the individual’s behalf. For example, if an individual has someone attend to vote as proxy, we would consider this indirect involvement. Also, if on the facts an individual is in the background orchestrating or heavily influencing company decisions, then that would be considered as indirect involvement.

Usually, HMRC would consider individual shareholders who are also directors to meet the involvement condition as they are generally involved in the day-to-day running of the business.

Under the definition of qualifying interest (see INTM600830) an individual must be a participator in the closely-held company. A participator is defined in CTA10/S454 and this includes a loan creditor of the company. In situations where a company has acquired third-party funding, it is highly unlikely that the creditor would meet the involvement condition and would therefore not come within the scope of ITA07/S720 or ITA07/S727 in respect of transfers made by the company that had undertaken the funding.

Overall, this condition is intended to include individuals that have an active role in the business and company decisions and would not include an individual that is simply a passive shareholder with no involvement of any substance.

HMRC will examine the facts in relation to the evidence provided and the individual’s circumstances, in those cases where the individual is asserting they are not involved in the company, to conclude whether the condition has been met. Officers should be reasonable in examining and requesting information where a long period of time has passed since the transfer was made, and consideration will be given to individual circumstances.

If an individual can satisfy HMRC that they had no involvement in the company’s decision-making, then they do not meet the conditions to be treated as ‘such an individual’ for purposes of ITA07/S720 and ITA07/S727 and no ToAA charge in relation to relevant transfers made by the closely-held company would apply.

The phrase ‘satisfies an officer of HMRC’ also appears within the motive exemptions set out in ITA07/S736-S742A (see INTM602680). The meaning of this phrase within the involvement condition is the same, but in the context of this condition the onus is on the individual to satisfy HMRC that they were not involved in the decision-making of the company. The individual subject to the potential charge will be in possession of the full facts needed to demonstrate how they are not involved and it is for the individual to determine the evidence which they consider appropriate to support their case.

Officers of HMRC should seek information which helps them determine the level of involvement an individual has in the decision making of a company. They should expect an individual who is not involved in the company's decision making to assist them in this as officers are not in a position to be prescriptive as to what evidence is required; they can have no knowledge of what information or documentation may be available. It is important to establish the facts and review all documentation that supports them.

Example 1

Zoe and Sam are married and have two children, Cat and Ron. They each hold 25% of the shares in T Ltd, a UK resident company. Cat and Ron are 18 and 19; both are in university. Zoe and Sam run the business and wanted their children to also have a share in the business to potentially take over when their parents retire in 30 years’ time. Currently, neither Cat or Ron know anything about the business nor have anything to do with the company. It is likely they could both satisfy HMRC that they have no involvement in the decision making of T Ltd.

Example 2

Marcus, Ian and John hold all the shares in UK company A Ltd in equal proportions. Marcus and Ian are directors, and when the business started John was involved in the decision to appoint them both. John is a passive shareholder with no involvement in any business or company decisions and has attended no meetings. Marcus and Ian decided they wanted to transfer the business of A Ltd to B Ltd, a Mauritian resident company. The business was transferred to B Ltd and profits accrued in Mauritius.

Marcus and Ian are clearly involved in the company and would meet the involvement condition. John has previously been involved in the company on a one-off basis but on the face of it has not had any involvement since. It would be likely that John could satisfy HMRC that he did not have any involvement in the company by demonstrating with evidence that he has not been present when other decisions were made or had any input into the decisions made on behalf of A Ltd.

If, on the facts above, John attended shareholder meetings and voted for/against motions, John would likely meet the involvement condition.

It is worth highlighting that just because the individual meets the involvement condition it does not automatically mean that ITA07/S720A or ITA07/S727A would be met. There also needs to be consideration of the avoidance condition (INTM600845) as the two conditions work in tandem.


Finally, within the involvement condition there is an arrangement clause set out at ITA07/S720A(7) and ITA07/S727A(7).

This means that where an individual has arranged through an agreement, understanding or series of transactions to give the appearance of the involvement condition as having not been met, HMRC will disregard this arrangement.

The result of HMRC disregarding an arrangement is that, where the involvement condition would have been met had it not been for said arrangement, we would treat the condition in question as having been met.

When determining if there is an arrangement in place, regard must be had for what happened before, during and after the relevant transfer and what the evidence and facts show.

Example 3

If we take the facts from Example 2 above, they would suggest John had no involvement in the business decisions in respect of A Ltd and that it is likely he could satisfy HMRC of that fact. However, for the purposes of this example, John has been advising Marcus on how they can drive A Ltd’s business forward.

Although the records of board meetings suggest that decisions were taken by Ian and Marcus alone, it is clear from copies of advice and emails that Marcus had little business knowledge in fact and that John was in the background driving the majority of the business decisions with Ian.

We would disregard John’s arrangement of channelling his decisions through Marcus to make it appear that John was not making any company decisions, and we would treat the involvement condition as having been met. Provided the other ToAA conditions are met, and John also meets the avoidance condition (see INTM600845), John will be charged under ToAA on any income arising to the person abroad in proportion with his qualifying interest in A Ltd (see INTM600800). Also, even though John was advising Marcus with those business decisions, Marcus was still agreeing with them and voting in favour for them, so would still meet the involvement condition on that basis.