Valid commercial exemption?

Key Facts

  • The Tribunal has drawn a distinction for the motive test between having a commercial transaction which is then structured to avoid tax and commercially establishing a structure for a non-avoidance purpose
  • If someone has established an offshore structure whether holding investments through a life policy (a personal portfolio bond) or say a Qualifying Non-UK Pension Scheme (QNUPS) and the motive is flawed, they could be within the penalties up to 200% of the potential lost revenue as well as the offshore criminal offence

Are you relying on a commercial exemption for potential tax liabilities on your offshore structure?

There has always been an available exemption from anti-avoidance legislation that applies to transfer of assets abroad. That exemption may have arisen because the transfer was done to facilitate commercial transactions, protect assets and also because one of the main motives was not the avoidance of tax. The test is one establishing the motive of the transferors.

The motive test was recently considered in a tribunal case: (1) Andrew Davies (2) Paul McAteer (3) Brian Evans-Jones V R & C Commrs [2018] TC06733.

Whilst the case regards a specific structure, the principles regarding what is “commercial” are important for many offshore structures.

The Appellants had taken out life policies with a Bermudian provider, which in turn held the shares in a company that completed on property transactions. The Appellants transacted through an offshore company to avoid UK tax being paid on the income generated by the property development. Mauritius was specifically chosen because of the UK/Mauritius double taxation agreement under which income would be solely taxable in Mauritius, at an effective rate of tax around 3%.

The Appellant argued:

  • they were subject to UK tax in relation to life policies they held
  • the arrangements were not established for the purpose of tax avoidance
  • the arrangements were for bona fide commercial purposes being property development and the provision of pension arrangements
  • that tax had been paid in Mauritius and the double tax convention provided relief so that the Appellants were not subject to UK income tax under the assessments

It was accepted that tax deferral could amount to avoidance for the purposes of the anti-avoidance legislation. However, it was contended that no avoidance existed because income tax was paid on the profits in Mauritius and income tax would be paid by the Appellants on the occurrence of a chargeable event in relation to the proceeds of their policies. It was also contended that the tax treaty protected the position.

The Tribunal found that:

  • Avoiding a liability to taxation was one of the purposes for which the transfer or associated operations were affected
  • Whilst there were commercial elements to the transactions, the overall arrangement was put in place, so UK tax was not paid on the profits of the property development
  • The legislation treated the income from the property development as the Appellants’ income
  • The offshore company’s income should be taxed as if it were the individual’s income and they may claim any reliefs that would have been available to them
  • Relief under the Treaty would not have been available to the Appellants had the income actually arisen to them

The decision was released shortly before the requirement to correct deadline of 30 September 2018. The case is important because if someone has established an offshore structure, whether holding investments through a life policy (a personal portfolio bond) or say a Qualifying Non-UK Pension Scheme (QNUPS) and the motive is flawed, they could be within the penalties up to 200% of the potential lost revenue as well as the offshore criminal offence.