INTM600760 - Transfer of assets abroad: The income charge: The individual - such an individual

The person who is liable for any tax charged under the income charge is the individual to whom the income is treated as arising (INTM600620). That individual is described as ‘such an individual’. This is not just any individual but specifically the individual described in the preamble (INTM600700).

The importance of the phrase ‘such an individual’, which also appeared in the earlier legislation, is evidenced by the consideration that the courts have given to it over the years. For example, Lord Nolan records in the case of Willoughby v CIR (70 TC at page 114):

The crucial words, as it seems to me, are those in subsection (1) which state that the section is to ‘have effect for the purpose of preventing the avoiding by individuals ordinarily resident in the United Kingdom of liability to income tax by means of transfer of assets’, coupled with the identification, in subsection (2) of “such an individual” as the subject of liability. What can the words “such an individual” refer to save for an individual of the kind described in subsection (1), that is an individual ordinarily resident in the United Kingdom seeking to avoid liability by means of transfers of assets?

In context, Lord Nolan was considering here the issue of ordinary residence, see INTM600780, but what is clear is the special significance of the phrase and the fact that it encompasses far more than just any individual. As the Special Commissioner observes in CIR v Botnar (72 TC at page 239):

it therefore follows that “such an individual” is an individual ordinarily resident in the United Kingdom who, by means of a transfer of assets in consequence of which income becomes payable to a non-resident, avoids liability to income tax apart from the operation of these provisions.

Whilst it may therefore be the case that there is no ‘condition precedent’ that there must be actual avoidance of tax liability for an income charge to arise to such an individual, it must be the case that an outcome of the transactions is that absent the income charge a liability to income tax would be avoided. And that, without the income charge, the individual who is the subject of charge is the one who will in effect have avoided income tax as a result of relevant transactions. Therefore, where there is no avoiding of liability to income tax or otherwise the relevant conditions are not met, there can be no application of the income charge, there in effect being no ‘such an individual’ as is chargeable by the provisions.

The question of whether a specific person was ‘such an individual’ for the purposes of the ToAA provisions featured prominently in Andreas Rialas v HMRC ([2020] UKUT 0367 (TCC)). Mr Rialas (R) and Mr Cressman (C) each owned 50% of the shares in a UK company: Argo, a successful fund management business. R’s relationship with C broke down. Another company was interested in purchasing the Argo shares but only if C was not involved with Argo. R explored ways in which he could buy C’s Argo shares. R created a BVI company (Farkland) whose shares would be owned by an offshore trust set up for the benefit of R’s family. Farkland borrowed funds and bought C’s Argo shares; R played a key role in ensuring that Farkland could successfully borrow this money on generous terms. Later, Argo paid dividends to Farkland and R.

Whether the ToAA legislation could apply to the dividends paid to Farkland centred around the wording of the phase ‘such an individual’. The Upper Tribunal commented at paragraphs [4]-[5] of its judgment:

[the ToAA code] does not expressly determine the characteristics a person must have in order to be “such an individual” for the purposes of [the legislation] so as to be made liable to income tax…Although the parties do not agree on the precise effect of the judgment in Vestey, they do agree that its result was that, in order to be “such an individual” who can be charged to income tax under [the ToAA code], a person needs to have some involvement in the “transfer of assets”. Where they differ is as to the nature and extent of the requisite involvement and it is that difference that lies at the heart of this appeal.

The Upper Tribunal held that R was not ‘such an individual’ as he was not the real transferor of C’s shares, and that R was not so responsible for C’s transfer of shares that R should be treated as if he had carried it that transfer himself.

A very simple example may illustrate the situation.

Example

Two UK resident individuals each plan to invest in a company overseas. The first individual invests directly in the overseas company by subscribing for shares, and he receives dividends on which he pays tax through his self-assessment. Even though on the face of it there is a relevant transfer, he is not ‘such an individual’ to whom the income charge applies because there is no avoiding of a liability to income tax. Therefore, the transfer of assets provisions do not apply.

By contrast the second individual sets up an offshore entity in a territory where it will not be charged tax on its income. The entity then invests in the overseas company by subscribing for shares and receives dividends. The dividends that arise to the entity cannot be charged directly on the individual. In this context the individual is ‘such an individual’ as would avoid liability to income tax apart from the operation of these provisions. Therefore, the transfer of assets income charge applies to prevent the avoiding of liability to income tax if all the other conditions are also met.