aim key cog flag clipboard-pencil podium flare signal lamp pie-chart graph scale2 hammer2 balance traffic-lights road archery wall share2 warning notification-circle circle-minus prohibited book book2 bookmark

Call your nearest office

Or ask us a question

Search our site

What are you looking for?

What is economic substance?

Facing a tax investigation? Need to make a disclosure to HMRC? Don’t worry. One of our team will be able to help. Just get in touch.

What is economic substance?

Demonstrating an economic substance test has become important, not just in the UK but also in a number of British Overseas Territories, including the Cayman and British Virgin Islands, and Crown Dependencies, including Jersey and Guernsey.  This new legislation will apply to companies and in some cases, limited liability partnerships.

 

The why

The purpose of the legislation is to ensure that such entities have sufficient ‘economic substance’ either in the jurisdiction in which they are incorporated, or another jurisdiction where they are tax resident.  In other words, tax transparency has become paramount.

The day of just having a ‘brass name plate’ and nominee shareholders and directors to all intent and purposes may soon be over.

 

The what

Each jurisdiction will have introduced its own legislation that may vary but the overall thrust will be broadly consistent.  Rather than the economic substance requirements applying to all entities, they apply to those carrying on certain ‘relevant activities’.

 

What is a relevant activity?

These include entities carrying on a:

  1. banking business
  2. insurance business
  3. fund management business
  4. finance and leasing business
  5. intellectual property business
  6. holding company business.

Each of these activities is defined and guidance will follow for each jurisdiction.

 

So what does this mean?

Any entity failing to meet these new requirements will result in substantial fines and/or the company being struck off.

Any entity incorporated in a relevant jurisdiction must demonstrate that it is under control of the local Directors, it has employees, has adequate expenditure and a physical presence in terms of premises or offices.

The difficulty is that guidance is jurisdiction specific and has not been issued in every jurisdiction yet.  However, it follows that any entity that does not currently have sufficient substance must either develop more local substance or become tax resident in another jurisdiction.

Whilst this can be achieved for the future, it does not automatically resolve the past. FATCA and the Common Reporting Standard have meant that any past tax irregularity also needs to be addressed.

 

The wider implications

There is no doubt that tax transparency is here to stay.  As such, advisors are on notice that their responsibilities and reporting requirements have become more onerous.

Does this lead on to finally mean the days are numbered for a brass name plate company?

 

More information on Tax Evasion here.

For help and advice on any tax investigation – get in touch with our specialist team.

If you wish to discuss this or any other matter with a member of the team, please contact us.

Get in touch

Whatever issue or question you have, we’ve got the answer.
If you want to get in
touch then please complete our form.

Birmingham

Sterling House
71 Francis Road
Edgbaston
Birmingham
B16 8SP

Leeds

Sterling House
1 Sheepscar Court
Meanwood Road
Leeds
LS7 2BB

London

New Derwent House
69 – 73 Theobalds Road
London
WC1X 8TA

Our addresses

Birmingham

Sterling House
71 Francis Road
Edgbaston
Birmingham
B16 8SP

Tel: 0121 456 1613

Leeds

Sterling House
1 Sheepscar Court
Meanwood Road
Leeds
LS7 2BB

Tel: 0113 3981100

London

New Derwent House
69 – 73 Theobalds Road
London
WC1X 8TA

Tel: 0207 025 4650