INTM603040 - Transfer of assets abroad: Exemptions from charge: Avoidance purpose exemption - design
Source: gov.uk (2025-04-07)


The word ‘designed’ was introduced into the legislation as long ago as 1938. This wording establishes a wider consideration of purpose and introduced the concept of some element of a purpose to avoid, into a series of bona fide commercial transactions.

Although the relevant transactions (INTM602700 (https://www.gov.uk/hmrc-internal-manuals/international-manual/intm602700)) may be commercial transactions (INTM603020 (https://www.gov.uk/hmrc-internal-manuals/international-manual/intm603020)), it is recognised that such transactions may be converted into avoidance vehicles. Consequently, where reliance is placed on Condition B (INTM602780 (https://www.gov.uk/hmrc-internal-manuals/international-manual/intm602780) and INTM602800 (https://www.gov.uk/hmrc-internal-manuals/international-manual/intm602800)) as having been met for the purposes of exemption from charge; in addition to providing evidence that there have been commercial transactions, the individual will need to provide evidence that none of the transactions were designed for the purpose of avoidance of tax.

Where it can be shown that any avoidance of tax was incidental to the design of the transfer of assets and any associated operations, HMRC accept that Condition B can be met. It is HMRC’s view that one of the essential elements of Condition B would not be satisfied where there was a significant element of tax avoidance purpose in the design of the transfer and any associated operations.

For those transactions in the period post-4 December 2005, Condition B is to be considered if Condition A (INTM602800 (https://www.gov.uk/hmrc-internal-manuals/international-manual/intm602800)) is not met because avoidance of tax is a purpose of one or more relevant transactions. In the circumstances, the individual will be recognising that tax avoidance was a purpose of one or more transactions resulting in Condition A not being met. Consequently, they will have to provide evidence that any such tax avoidance was incidental to the design of the transactions.

In a particular case, a relevant transaction may result in the establishment of a non-resident company which carried on a genuine trade or business. Evidence may suggest the choice of company location was not entirely commercially motivated but was influenced by the tax reduction that would be achieved by using an entity in that location as part of the structure. In those circumstances, it might be reasonable to conclude that the choice of location meant that the transactions were designed, at least in part, for the purpose of avoiding liability to taxation.

For example, if an individual running a hotel business established a company in a low tax jurisdiction to operate a hotel in that territory, it might be reasonable to conclude that the relevant transaction was a genuine commercial transaction not designed for the purpose of avoiding liability to taxation.

However, the position is potentially different if a similar company was established in the same low tax jurisdiction to own and operate a hotel in the UK. Although due regard must be had to all the circumstances of the case, the choice of location of the company would be a circumstance potentially pointing to the conclusion that the relevant transactions were not all genuine commercial transactions and/or were more than incidentally designed to avoid tax.

It therefore follows that establishing in a low tax regime is not of itself open to challenge, but there must be other commercial reasons to support that choice and activity must be genuinely aligned with it. In such a situation, for certain years, it may be possible that EU law fundamental freedoms are engaged; this is considered further at INTM603100 (https://www.gov.uk/hmrc-internal-manuals/international-manual/intm603100) onwards.

It is not possible to offer any precise definition of the word ‘incidentally’, in this context. The intention of the words ‘incidentally designed for the purpose’ is to allow exemption under Condition B where a series of commercial transactions involves only a minor element of tax avoidance.

For example, it will be necessary to consider whether a single transaction in a chain of transactions gives a tax advantage that was more than an incidental element of the design of the transactions. It may be that the effect of several transactions taken together suggests that tax avoidance was one of the underlying purposes, in which case it might be reasonable to conclude that the purpose of avoiding taxation was part of the overall design.

As mentioned in INTM602960 (https://www.gov.uk/hmrc-internal-manuals/international-manual/intm602960), the exemption provisions take into account the intentions and purposes of anyone who designs, effects or provides advice in relation to relevant transactions (INTM602700 (https://www.gov.uk/hmrc-internal-manuals/international-manual/intm602700)) whether for consideration or not. This means that if taxation is avoided both the intentions of the individual and the intentions of any advisor may be taken into account.