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HMRC internal manual

Banking Manual

Bank loss restriction: targeted anti-avoidance rule: meaning of tax value and non-tax value – tax value examples

Example 1

Company X has £5m of relevant carried-forward losses in the year ended 31 March 2016 whilst company Y has no carried forward losses.  The companies are connected.  Both companies anticipate profits of the period of £2m but otherwise do not anticipate being profitable in foreseeable subsequent periods.  Company X is a banking company, Company Y is not.

Absent any arrangements, both companies would have had £2m profits.  Company X would have relieved 50 percent of these with relevant carried-forward losses leaving taxable profits of £1m.  Company Y would have had taxable profits of £2m.  Overall the two connected companies have taxable profits of £3m.

The two companies enter an arrangement which increases company X’s profits by £1m and reduces the profits of company Y by £1m.

Company X will now have profits of £3m, 50 percent of which, absent the anti-avoidance rule, it would be able to relieve with carried-forward losses, leaving taxable profits of £1.5m.   Company Y will have profits of £1m.  Overall the two connected companies would have taxable profits of £2.5m.

The tax on the reduction in profits of £0.5m is therefore the tax advantage.

Example 2

The facts are as above but company Y is not liable to UK tax.

Absent the arrangements company X would have relieved 50 percent of its £2m of income with carried-forward losses leaving £1m in charge.  Company Y would have no profits liable to UK tax, so overall the two connected companies would have taxable profits of £1m.

As a consequence of the arrangements company X now has profits of £3m, 50 percent of which it would anticipate being able to relieve with carried-forward losses, leaving taxable profits of £1.5m.   Company Y still has no UK taxable profits so overall the two connected companies would have taxable profits of £1.5m.

As the arrangement has meant that the companies will pay more tax there is no tax advantage.