Interest Relief avoidance schemes (Spotlight 27)
Published 23 October 2015
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HM Revenue and Customs (HMRC) is aware of a number of tax avoidance schemes that seek to exploit the relief available for interest on loans, taken out to invest in trading partnerships.
The avoidance schemes claim to guarantee a stream of income to pay off the original loan. They seek an artificial tax advantage either by deferring tax (as the income stream is taxable in years after the relief is claimed) or, in some cases, to wipe out any tax due at all.
In the schemes reviewed by HMRC, the ‘partnerships’ are not engaged in trade, and do not qualify for the relief.
HMRC’s firm view on these schemes, supported by the courts, is that these partnerships are not trading and the interest relief is therefore not allowable. The Targeted Anti-Avoidance Rule, which denies interest relief where avoidance is the sole or main purpose of the arrangements, is likely to apply.
Customers, their advisers and avoidance scheme promoters, should be aware that HMRC consider these tax avoidance schemes to be ineffective. HMRC will act swiftly and rigorously to challenge all such claims of the relief in this way.
HMRC will investigate tax returns where these schemes have been used and seek full settlement of the tax due, plus interest and penalties where appropriate.
Some of these avoidance schemes have given rise to unexpected tax consequences, leaving individuals in a worse position than if they had never entered the scheme in the first place.
HMRC has recently had its view in relation to interest relief schemes upheld in the Brain Disorders Research Limited Partnership case.
If you are tempted to enter an avoidance scheme remember you can end up significantly worse off. HMRC has published Tax avoidance: an introduction.
Anyone who has invested in an interest relief avoidance scheme and wants advice on how to settle their affairs should contact HMRC.