Thinking of Moving Profits Between Companies?

The issue

These new rules apply where the companies enter into arrangements where payments are made of all/significantly all of the profits from one company to another (i.e. diverting profits), and where the arrangements were entered into for tax avoidance purposes. The company from which profits were transferred is taxed as though the transfer had not taken place, for example, if a deduction had been claimed for a transfer of profits. The effect of the clauses is that the profits transferred are added back for corporation tax purposes.

The target of the legislation is any arrangement that has the overall effect that all or a significant part of the profits of a company are paid to another company. The legislation refers to this payment as a 'profit transfer'. However, it would not apply where the arrangements have the effect of moving amounts to the company that actually earned the profits commercially.

The clauses take effect in respect of payments made on or after 19 March 2014, whenever the arrangements were entered into.

Procedures

Use of the legislation will be subject to the supervision of a specialist team within HMRC. As is usual for new legislation, HMRC will be willing to give advice on the application of the legislation.

To fall within the legislation, there are 2 requirements. There must be a transfer of profits, and it must have as its main purpose or one of its main purposes obtaining a tax advantage.

HMRC will give clearances on whether a “profit transfer” has occurred.

Some brief examples of potential situations caught

  • Contracts undertaken by non-resident companies – e.g. An online retailer 'fulfils' contracts in the UK, but the contracts are concluded with a non-resident group company. Provided that the profit arises offshore and does not involve a transfer of profits, the legislation cannot apply. If the arrangement does effect a transfer of profits, the legislation will apply if tax avoidance is involved.
  • Certain transfers of assets
  • Licence payments – e.g. A company based in the US licenses a UK group company to sell its product in the UK. The UK company may make payments under the licence agreement based on a percentage of turnover and these would not be profit transfer arrangements. Where there is an avoidance purpose the anti avoidance provision in the existing “corporate intangibles legislation” would act to counteract the avoidance.
  • Exploiting IP between a UK and a non UK company - Intangibles are legally held by a UK group company and a non-UK group company provides services in enhancing the intangibles. These services are substantial and quantifiable. The non-UK company is rewarded by a percentage of the profits arising from the exploitation of those intangibles. The nature of the payment is that of a genuine expense incurred in arriving at the taxable profits of the UK company and consequently, the new rules would not apply.
  • Contracts undertaken by non-resident companies – e.g. An online retailer ‘fulfils’ contracts in the UK, but the contracts are concluded with a non-resident group company. Provided that the profit arises offshore and does not involve a transfer of profits, the legislation cannot apply. If the arrangement does affect a transfer of the UK company's profits, the legislation will apply if tax avoidance is involved.