For many years, legislation has been in place which counters attempts to avoid tax by shifting assets abroad. Predictably, it’s known as the Transfer of Assets Abroad (“TOAA”) code. Specifically, it has effect for the purpose of:
“preventing the avoiding by individuals ordinarily resident in the United Kingdom of liability to income tax by means of transfer of assets by virtue or in consequence of which, either alone or in conjunction with associated operations, income becomes payable to persons resident or domiciled outside the United Kingdom.”
It’s one of the (several) reasons why simply popping assets into an overseas trust isn’t effective in saving tax; nor is hiring yourself out for a pittance to a tax haven “slave-master” company that then sells your services back into the UK.
How do the rules apply, if at all, to individuals who do not themselves transfer assets but are shareholders in a company which does? That has now been clarified by the Supreme Court in Fisher [2023] UKSC 44.
Various members of the Fisher family owned shares in a UK trading company. It paid tax on its profits and the Fishers paid income tax on the remuneration and dividends that they drew. For good commercial reasons involving Betting Duty, the UK company sold its business to a company that the Fishers also controlled, but which was resident in Gibraltar. On selling its business, the UK company charged a proper commercial price and paid tax on the gain accordingly.
The Fishers continued to pay the same income tax on remuneration and dividends from the Gibraltarian company as they had previously paid on remuneration and dividends from the UK company: the transaction did not reduce anyone’s income tax bill by so much as a penny. A visitor from another planet where tax laws make sense and are administered rationally might thus wonder at HMRC’s invoking a provision aimed at income tax avoidance at all.
Invoke it they did, though, taking the view that the Fishers had jointly transferred assets (the business) as a result of which income (profits of the business) had arisen to a non-resident (the Gibraltarian company) and that under the TOAA rules they were (as ‘transferors’) liable to pay income tax on the whole of those profits (whether or not they actually received any part of them).
Although the interpretation of the TOAA code raised many questions, the key question for the Supreme Court was this: for the purpose of the code, were the individual shareholders the ‘transferors’ of the business despite the fact that the legal owner and actual transferor was the company? If they were not, the tax assessments fell away.
The Supreme Court held that they were not. It’s worth noting that none of the individual members of the Fisher family had a controlling interest, though between them they did. However, the Supreme Court decision is not limited to non-controlling shareholders, holding that a shareholder is not a ‘transferor’ in relation to a transfer made by a company, even if he or she holds 100% of the shares.
Significant though the decision is, it’s important to appreciate its limitations.
First, the case establishes that no individual can be a ‘transferor’ in relation to a transfer made by a company. It remains the case that if someone (a ‘non-transferor’) receives a benefit consequential upon a transfer of assets abroad made by another person, the benefit may be charged to income tax. This is unaffected by the Fisher decision.
Second, does this open the door to easy sidestepping of the TOAA rules? Can I now just transfer an asset (within the UK) to a company which I control and then have the company make the transfer abroad? No: as the Supreme Court noted: ‘The interposition of the UK company would be regarded as a device, and the substance of the transaction would still be a transfer of those assets by the individual to the foreign entity.’
Will HMRC seek to change the law? Who knows? Meanwhile, for advice and assistance on the TOAA rules, please get in touch with your usual BKL contact or use our enquiry form.