INTM610020 | Introduction: Who do these rules apply to? / How will these rules be used?

Who do these rules apply to?

This legislation is only expected to apply to a small number of individuals or bodies corporate who are UK resident and enter into arrangements with the intention of reducing the profits chargeable to UK tax.

The only persons who are likely to need to consider these rules will be those who are involved with offshore structures. This is because to require adjustments under this legislation, arrangements must meet the four conditions to be Profit Fragmentation Arrangements, and not satisfy either of the two Exception Conditions.

The legislation will only apply when:

The arrangements are Profit Fragmentation Arrangements:

• A UK resident party has arrangements with an overseas party as a result of which value deriving from the profits of a UK business is transferred out of the UK.

• The amount of value transferred out is greater than it would have been had the arrangements been made between independent parties acting at an arm’s length.

• It is reasonable to conclude that some or all of the value transferred relates to something done by, or any property, right, or purported right of, an individual who is related to the UK resident party.

• The related individual is able to enjoy the benefit of the value transferred, or has procured the arrangements with a view to avoiding the enjoyment conditions.

And, they do not satisfy either of the two Exception Conditions. The Exception Conditions are that either:

• The arrangements result in the overseas party paying at least 80% of the tax that the UK resident party would have paid; or

• The arrangements have not been entered into with the main purpose or, one of the main purposes, being to obtain a tax advantage.

The Profit Fragmentation legislation reinforces existing tax legislation. It will only apply after other existing provisions and only to the extent that the existing provisions have not fully counteracted any tax advantages arising from the arrangements. This means that if other tax legislation is being correctly applied such that the correct amount of UK tax is being paid by the resident party then the Profit Fragmentation legislation will not apply.

For more details regarding the interaction between the Profit Fragmentation legislation and other provisions see INTM610250.

The Profit Fragmentation legislation applies to businesses of any size. In particular, there is no equivalent to the exemption for Small and Medium-sized Enterprises within the transfer pricing legislation (INTM412070).

How will these rules be used?

UK resident parties with Profit Fragmentation Arrangements that do not satisfy at least one of the Exception Conditions must make adjustments to the amounts included in their self-assessment returns to ensure the amount of profit that should be taxable in the UK is fully taxed in the UK.

If UK residents have failed to make the requisite adjustments required by the Profit Fragmentation legislation, HMRC will use existing enquiry powers to enquire into the incorrect return.

In their simplest form, cases to which this legislation applies may involve only a single overseas company, trust or partnership, in addition to the resident party. However, usually the arrangements will be more complex, using a series of interconnected companies, or other foreign legal entities. In practice this legislation should always be considered alongside other existing provisions.

All compliance checks involving the possible application of the Profit Fragmentation legislation must be done in conjunction with, and with the agreement of, appointed Single Points of Contact (SPOCs) in the Customer Compliance Group.