UK tax treaties anti-avoidance: Proposed legislative changes countering the use of avoidance schemes to obtain benefits pursuant to the UK’s network of double tax treaties

Sullivan & Cromwell LLP - August 25, 2011
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Note: On 9 September 2011, the UK Government withdrew proposed legislative changes countering the use of avoidance schemes to obtain benefits pursuant to the UK’s network of double tax treaties. See our short publication dated 12 September 2011.

On 1 August 2011, HM Revenue & Customs (“HMRC”) published a technical note on a proposed change to the law governing the availability of relief from double taxation pursuant to the UK’s network of double tax agreements (“DTAs”, commonly referred to as “double tax treaties”).

If implemented in its present form, the proposed draft legislation would deny relief from UK tax pursuant to a DTA where there is a “tax avoidance scheme” in place. The concept of a tax avoidance scheme is wide, and covers any kind of scheme, arrangement or understanding (formal or informal) of which the main purpose, or one of the main purposes, is to secure the application of a DTA to applicable income (being income, profits and gains in the case of UK-resident taxpayers, and certain types of UK-source income in the case of non-UK resident taxpayers), where that DTA would not have applied to the applicable UK income absent the scheme.

The proposal is at an initial stage in which HMRC are seeking views before enacting appropriate measures in the UK Finance Bill 2012, which is expected to become law in July 2012.

As drafted, the proposals seem stricter than current law and practice, and several areas remain to be clarified by HMRC. In particular, it is unclear whether DTA clearances granted before any change in law will continue to be valid. Therefore, it is advisable that any pending applications for relief from UK tax pursuant to a DTA are submitted to HMRC without delay in order to take advantage of the current regime, particularly since obtaining a UK DTA clearance can be a lengthy process.