B4.208 Tax adjustments to counteract profit fragmentation arrangements
From 1 April 2019, or 6 April 2019 for non-corporates,1 targeted anti-avoidance legislation applies to counter arrangements which involve a 'fragmentation of profit' between two or more jurisdictions if the profit is in substance derived from activity in the UK2.
The rules are widely drawn and encompass companies and individuals, including those in partnership3.
The avoidance which is targeted by these provisions typically involves some or all of the profits of a UK business being diverted to an offshore entity which pays little or no tax. The entity might, for example, be an offshore company owned by an offshore trust. The UK trader would not necessarily be a settlor or trustee of that trust and may even be excluded from benefitting from the trust assets, but there will be some means by which amounts can accrue to him or to persons linked to him. It is not intended that this legislation will capture straightforward commercial transactions4.
The rules work by applying various tests which consider whether profits have been fragmented and diverted so as to be outside the charge to UK tax. The fragmentation is then counteracted by adding the diverted profits to the profits of the UK trade.
The UK already has extensive anti-avoidance legislation aimed at structures which artificially divert profit out of the UK, including the following:
• transfer pricing rules, see Division B4.1
• the diverted