Anti-avoidance: the UK’s tax legislation and EU freedoms

Posted at 10:29 am on January 18, 2016 by John Kavanagh

Anti-avoidance: the UK’s tax legislation and EU freedoms

For many years now, there have been serious doubts among a number of tax advisers, myself included, about the compatibility of much of the UK’s anti-avoidance tax legislation and EU law. I remember having a conversation about 10 years ago with a colleague who had previously been a corporate tax partner in a Big 4 firm in which he expressed incredulity at my suggestion that the Transfer of Assets Abroad provisions might not apply to a UK individual establishing a company in Lithuania – which had then only just become a full member of the EU – irrespective of whether the planned transaction satisfied the so-called “motive test”. In those days, the idea of disputing the applicability of UK anti-avoidance legislation involving EU entities on the basis that it was incompatible with basic EU treaty freedoms was distinctly left field. While the primacy of EU law was always universally accepted in the world of VAT, the idea that it might have relevance for direct taxes took rather longer to take hold.

Yet time passed, and the rumblings of doubt and discontent grew louder. And then, in early 2011, the European Commission formally requested the UK government to review two sets of legislation – the Transfer of Assets Abroad provisions as mentioned above, and the capital gains tax (CGT) provisions attributing gains to members of non-UK resident companies – on the grounds that they were “discriminatory” because they breached the right of freedom of movement of capital enshrined in the Treaty of Rome.

The Government clearly accepted that this was so and duly modified both of these provisions in the 2013 Finance Act. Yet doubts still remained as to whether the amendments had gone far enough to eliminate discrimination. In 2014, the case of Fisher v HMRC was heard. This case involved the shareholders of the bookmaking firm, Stan James, which had moved its business to Gibraltar in order to benefit from a lower rate of betting duty. One of the issues in that case was whether the right of freedom of movement of capital overrode the provisions of the legislation regarding motive. On that aspect, the taxpayer won.

It therefore seems clear that what appears on the statute book in black and white may not in fact represent the law as it currently stands when EU freedoms are taken into account – and this is in no way limited to the  specific provisions with which the European Commission has so far taken issue. It is arguable that EU treaty freedoms including the right to free movement of capital and the right of establishment defeat much of the UK’s anti-avoidance legislation, at least where EU citizens and entities are involved. There are arguments that these freedoms may also extend to those tax havens such as the Isle of Man and the Channel Islands which are UK Crown dependencies. This has far-reaching consequences for internationally mobile individuals, multinational businesses, offshore structures and cross-border transactions generally.

Please contact us if you would like to discuss how this might affect your tax planning.

 

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