The legislation seeks to prevent profits being transferred to another group company by way of a payment of all, or a significant part, of the profits of a company. The legislation is primarily targeted at payments under derivative swap contracts but catches other types too. The new legislation entered into force on July 17 2014 with retrospective effect with regard to such payments made on or after 19 March 2014. A new section 1305A has been introduced into Corporation Tax Act 2009 by the Finance Act 2014. It is primarily aimed at payments that transfer profits to tax havens.
The new legislation applies if:
- Two companies ('A' and 'B') are party to any arrangements (whether or not at the same time)
- A and B are members of the same group
- The arrangements result in what is, in substance, a payment (directly or indirectly) from A to B of all, or a significant part of, the profits of the business of A or of a company which is a member of the same group as A or B (or both) (qualifying as the profit transfer)
- The main purpose, or one of the main purposes of the arrangements is, to secure a tax advantage for any person involving the profit transfer
If this rule applies the profit of A must be calculated for corporation tax purposes as if the profit transfer had not occurred. This means that the distributed profit is, in principle, included in the taxable amount and subject to UK tax.
In summary, this legislation is aimed to combat particular avoidance schemes, but as we have seen in the past there may be other circumstances where it is used, particularly as some of the terms in the legislation are open to interpretation. It is therefore important to be aware of the existence of these rules if payments are made that could be deemed to lack commercial purpose or are arguably artificial in nature and transfer profits around a group