What are the s720 deemed income provisions?

By February 29, 2020April 28th, 2020No Comments

Anti-tax avoidance rules explained.

S720 is once of the most important anti tax avoidance provisions available to HMRC in respect of offshore business.

The general idea that it is a bad idea for offshore companies to have UK resident directors is quite widely understood. Formally this is known as the management and control case law rule.

Less well known, but equally important, are the deemed income provisions contained within  s720/721/731 of the Income Tax Act) – see here.

This provision is relevant to UK residents who have an interest in an overseas company – even where that company is properly controlled outside the UK. It can be summarised as follows:

Where a person (transferor) makes a ‘relevant transfer’ which transfers assets abroad (e.g. to an Isle of Man / offshore company) and income arises as a result of the transfer and that person (or their immediate family) has the power to enjoy the income – then that income is deemed to be theirs for tax purposes and they will be charged to tax accordingly.

Note that the income does not have to be actually remitted to that person (transferor) or their family – they simply have to have the power to enjoy it.

Further, the definition of what constitutes an asset is drawn very broadly as is the definition of what constitutes a transfer..This rule is often invoked where HMRC has failed to demonstrate that the tax residency of an offshore company resides in the UK.

See the relevant section of the HMRC internal manual

There are some exceptions to this rule – most notably, there is a motive defence which means that it should not apply where the reason for setting up the structure offshore was commercially rather than tax driven