When it comes to offshore tax planning for UK people; the UK anti tax avoidance rules are very widely misunderstood. Most people assume that if they conduct business through an offshore company then they won’t get taxed on the profits until those profits get distributed to them.
It sounds reasonable – doesn’t it? – corporate tax in the Isle of Man in generally zero % – and if no profits are sent to the UK owner why should there be any tax at all ?
Unfortunately … generally speaking, it is incorrect.
There are two UK tax laws which are specifically aimed at defeating this notion. i.e. making sure that the UK owner pays tax on the income of the Isle of Man / Offshore company whether that income is distributed to them or not.
The first one it the ‘Management and Control’ test.
The ‘Management and Control’ test is a test aimed at companies and it says that if a company, any company – regardless of its place of incorporation, is managed and controlled in the UK then that company will be liable to UK corporation tax, as if it was incorporated in the UK.
As a result offshore companies that are controlled by principals who are resident in the UK are likely to be deemed by HMRC to have their management and control in the UK and are liable to UK corporation tax accordingly. The next obvious question is what constitutes ‘management and control’ ?
This rule has existed for a long time and clearly it is a subjective area – as a result a body of case law has arisen which is relevant in determining where the mind and management of a company resides and there is quite a lot of information in HMRCs handbook on this topic.
By way of example, an Isle of Man Company with a bank account capable of being controlled by a UK resident person would (most likely) be considered to be managed and controlled in the UK.
The second are the “Deemed Income Provisions.”
The deemed income provisions are contained within (Income Tax Act s720) – look them up here if you like…and work as follows;
Where a person (transferor) makes a ‘relevant transfer’ which transfers assets abroad (e.g. to an Isle of Man / offshore company) and income arises as a result of the transfer and that person (or their immediate family) has the power to enjoy the income – then that income is deemed to be theirs for tax purposes and they will be charged to tax accordingly.
Note that the income does not have to be actually remitted to that person (transferor) or their family – they simply have to have the power to enjoy it.
Further, the definition of what constitutes an asset is drawn very broadly as is the definition of what constitutes a transfer, so the reader should not be tempted to think that the rule is easily defeated by careful semantics.This rule is generally invoked where HMRC has failed to demonstrate that the management and control of an offshore company is resides in the UK.
There are some exceptions to this rule – most notably, there is a motive defence which means that it should not apply where the reason for setting up the structure offshore was commercial and not UK tax driven, further some advisors hold that tax treaties with certain jurisdictions (eg Cyprus, Malta, Ireland) can be used to override the provisions and finally, sometimes, it is genuinely possible to structure transactions so that they fall outside its gambit.

photo credit: mellyjean via photopin cc


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