CTM07535 - Corporation Tax: tax avoidance involving carried-forward losses: Tax value and non-tax value

CTA10/S730G(7) and (8)

Condition D in CTA10/s730G(6) is that the anticipated tax value of the tax arrangements must be greater than the anticipated non-tax value of the arrangements in order for the rule to apply.

Both the tax value and the non-tax value will be calculated on the basis of the company alone, or the company and any other connected companies party to the tax arrangements.

Tax value

The tax value is defined as the total of the relevant corporation tax advantage, the relevant CFC charge advantage and any economic benefits generated from it. As a simple example, the tax saved may be put into a savings account; any interest arising on the tax will be income generated from the tax advantage and will count toward the tax value.

The relevant corporation tax advantage is a corporation tax advantage involving the use of the carried-forward losses against the profits of the arrangement, and the deduction arising from the arrangement. In the case of the tax value it is the anticipated relevant corporation tax advantage that is important.

Corporation tax advantage is defined in CTA10/s730H, and includes:

  • A relief from corporation tax or increased relief from corporation tax;
  • A repayment of corporation tax or increased repayment of corporation tax;
  • The avoidance or reduction of a charge to corporation tax or an assessment to corporation tax;
  • The avoidance of a possible assessment to corporation tax; or
  • The deferral of a payment of corporation tax or advancement of a repayment of corporation tax.

In the case of the carried-forward reliefs, it is the value arising from the increased use of the reliefs in any relevant accounting periods as a consequence of the tax arrangements. In the case of the profits, it is the increased relief against those profits as a consequence of the arrangements. In the case of the new deduction, it is the value of that deduction. There are likely to be overlaps and interactions between these in order to produce the net corporation tax or CFC charge advantage.

Example 1

For periods involving losses arising before 1 April 2017

Companies X and Y are connected. Company X has £5m of carried-forward losses. Both companies anticipate profits of the period of £2m, but otherwise do not anticipate being profitable in foreseeable, subsequent periods.

In order to make full use of company X’s carried-forward losses, the two companies enter an arrangement which increases company X’s profits by £3m, whilst generating a deduction of £3m in company Y.

Company X will now have profits of £5m, all of which, absent the rule, it would anticipate being able to relieve with carried-forward losses. Company Y will have a loss of £1m, which it can surrender as group relief to other profitable companies in the group.

Absent the arrangements, both companies would have had £2m profits. Company X would have relieved its profits with carried-forward losses and so would have paid no tax. Company Y would have paid tax on its £2m profits. Following the tax arrangements, neither company pays any tax, but another group company (i.e. a connected company) will now have a deduction of £3m. The relevant corporation tax advantage is the tax on the £3m reduction in profits created by the tax arrangement.

Example 2

For periods involving losses incurred on or after 1 April 2017

Companies A and B are part of a group. Company A has post 1 April 2017 carried-forward losses of £1m and Nil profits for year 1. It has not been allocated any of the £5m deductions allowance. In year 2 it anticipates that it will also have Nil profits but company B has profits of £1m and, again, neither company has been allocated any of the £5m deductions allowance.

The group decides to use a loss refresh arrangement to generate a profit of £2m in Company A in Year 1 which is followed by a tax loss of £2m in Year 2.

In Year 1, Company A would be able to set the carried-forward losses in full against the £2m profits and would therefore pay tax on £1m. In Year 2, it could surrender £1m of the current-year losses as group relief to Company B and carry-back £1m to set against the remaining Year 1 profits resulting in these companies paying no tax overall.

Absent the arrangements, Company B would have had profits of £1m and company A would have carried-forward losses of £1m that remained unrelieved. Following the tax arrangements, Company A has utilised all its carried-forward losses and created a deductible amount in year 2. Company B does not pay tax on its £1m profits. The relevant corporation tax advantage is the tax on the £1m profits.

Non-tax value

The non-tax value is defined as the value of any economic benefits other than the tax value. The assessment is therefore based on the overall value of the economic benefits of the tax arrangements, and whether or not the tax value is anticipated to be more than half of that overall value.

If, in the first example above, the profit in company X and the deduction in company Y had arisen from the interest on a loan between the two parties, the non-tax value would be the value to the group of entering into that loan, not including any tax value. If the loan had no commercial purpose, then overall the non-tax position is neutral:

  • Company X will have an asset in the form of the debt and a reduction in its assets for the money loaned;
  • Company Y will have an asset in the form of the money borrowed and a liability in its debt; and
  • Company X receives more income, and company Y receives an equal amount less income.

Hence, overall between the connected companies the position is neutral.

If the loan was part of a wider arrangement which generated economic benefits for the group, this would be taken account of as part of the non-tax value.

Arrangement 3 at {CTM07550} contains an example of a situations where the value of the non-tax economic benefits of the arrangements outweighs the tax value.