INTM603020 - Transfer of assets abroad: Exemptions from charge: Avoidance purpose exemption - commercial transactions

Exemption from charge may be appropriate where the transactions were made for commercial purposes and were not designed (INTM603040) for tax avoidance purposes. Where tax has been avoided but this was merely incidental to the commercial purposes, the test at Condition B (INTM602780 and INTM602800) could be met.

In this context, HMRC have treated ‘commercial’ as applying only to the furtherance of trade or business, and not to the passive holding of investments. The term has now been clarified in the legislation (ITA07/S738).

First, the transaction must be effected

• in the course of a trade or business, or
• with a view to setting up and commencing a trade or business

and, in either case, for the purposes of that trade or business.

Second, the transaction must not be

• on terms other than those that would have been made between persons not connected with each other dealing at arm’s length or,
• a transaction that would not have been entered into between such persons so dealing.

The above provisions ensure that transactions taking place other than at arm’s length will not satisfy the terms of Condition B. This will prevent individuals claiming exemption on contrived grounds of ‘commerciality’.

An example of this might be where an offshore company is established as a conduit or ‘money box’ for personal fee income. It will also prevent claims that the establishment of a non-resident family trust was for ‘commercial’ reasons.

HMRC accept that the creation of some trusts will satisfy the ‘commerciality’ tests, for example an employee benefit trust established for the benefit of a group of employees and funded on arm’s length terms. Although, when considering condition B in the context of an employee benefit trust, it should always be borne in mind that there is a second strand to be taken into account: that it must not have been designed for the purpose of the avoidance of tax. This is considered further at INTM603040.

The legislation also provides that:

• the making of investments
• the managing of investments
• the making and managing of investments

do not constitute a trade or business except to the extent that the person by whom the activity is done, and the person for whom it is done are persons not connected with each other and are dealing at arm’s length.

The aim of this is to distinguish between asset management activity (which is a business chargeable for reward), and merely holding assets for possible increase in value.