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Good business/commercial reasons for offshore company & the motive exemption

The main income tax anti avoidance rules relating to UK residents using offshore companies are  contained in the transfer of asset provisions.

These rules apply where the following conditions are satisfied:

  • There must be a transfer of assets by an individual
  • As a result of the transfer income becomes payable to a non-resident person.
  • The transferor must have power to enjoy that income in some way, or receive/be entitled to receive a capital sum.
  • The transferor must be ordinarily resident in the UK in the year of liability.

If all of these conditions are fulfilled, the income which becomes payable to the offshore company/trust is deemed to be that of the individual who made the transfer, to the extent he has power to enjoy that income.

The UK tax authorities take a wide view of what constitutes a transfer of assets.
For example these rules may apply:

  • where an individual transfers cash to establish a non-resident trust, or ubscribes for the share capital of an offshore company,
  • where an individual transfers assets such as shares or property to a new or existing non-resident trust or other person or company abroad.

    It can also apply where intangible assets are transferred; for example a UK individual may transfer his services to an offshore company.

  • It's rarely worth arguing that there is no transfer of assets, as the scope of the rule is very wide.

  • Therefore in practice any UK residents that look to transfer any income producing trade or assets into an offshore company will be very concerned with this provision as it will mean that they will still be taxed in the UK.

Motive exemption

There is though an exemption from these anti avoidance rules where you can show that:

  • avoidance of taxation was not the purpose or one of the purposes for which the transfer was effected or
  • the transfer and any associated operations were genuine commercial transactions and weren't designed to avoid tax (note this is UK tax)

Actually persuading the Revenue that you can take advantage of this exemption can in practice be difficult.

So who can take advantage of the motive exemption?

The main cased where you'll be able to take advantage of the motive exemption are:

  • Where you carry on a business abroad. Provided the reason for the use of an offshore company is commercial you'll be able to claim exemption from the income tax avoidance rules.

So you’d be looking at any arguments that support your requirement to use an local company (eg for commercial purposes having a locally incorporated company may be preferred by customers etc).

  • Where the offshore company is set up by someone who is not UK resident and not at that time concerned with UK tax.

Note that avoiding foreign taxes is OK and won't be caught by the avoidance rules, it's just if the offshore company is set up to avoid UK taxes that it will be caught.

If the individual subsequently comes to the UK he would then have a good claim for the motive exemption. There are also provisions to tax other family members that benefit from the offshore company, but again they would have a good claim for the motive exemption.

If a UK resident owning an interest in an offshore company can take advantage of this, they can use the offshore company as an income shelter avoiding tax on the income. They would need to obviously ensure they didn’t extract dividends above their basic rate band otherwise tax would be charged on those.

A good way to access the cash could be to extract tax free after becoming non resident in the future. 

There is no provision for a "clearance" or other advance ruling on the application of the motive defence. Claims to the motive defence may appear in the Foreign Pages of the Tax Return. The additional information section of the return may also be used to provide additional information about a claim.

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