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HMRC internal manual

Company Taxation Manual

HM Revenue & Customs
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Corporation Tax: management expenses: targeted anti-avoidance rule (TAAR) - example of arrangements caught

A UK company is entitled to receive dividends from an overseas subsidiary (X).However prior to any dividend payment, the subsidiary grants rights to a fellow overseas subsidiary company (Y) allowing it to acquire new shares in X at a future date. Y pays X an amount for these rights that reflects almost the full value of X, and is thereby able to restrict the ability of X to pay over any dividend. As a result of these transactions, the UK company has to get permission from its subsidiary Y in order to receive the same dividends from X which it had already been entitled to. To get the necessary permission, UK company agrees to pay a sum of compensation to Y and claims that compensation as an expense of management. The amount of the compensation paid is almost equal to the amount of dividends it will receive from X. There is no economic loss to the group, the money has gone around the group, but on the way it has created an expense (the compensation) which is deducted as expenses of management in the UK.

There are arrangements in place, a series of transactions by which the UK company ends up having to pay for something to which it was already entitled. Evidence obtained during the enquiry shows that the arrangements were implemented after the group was approached with an avoidance scheme. It is clear from that evidence that without the tax advantage that the scheme seeks to achieve these transactions would not have been entered into. Given that the UK company was already entitled to the dividends and there is no actual expense to the group, there was no evident commercial purpose to the transactions. The main purpose for entering into the arrangements is to obtain the deduction for the management expenses under S75. It is a contrived deduction, which is then group relieved in the UK, creating a tax advantage. The TAAR applies accordingly to the arrangements, and no relief under section 75 ICTA is due for the compensatory payment made by the UK company.

Whilst this scheme would certainly be caught by the TAAR, HMRC are also of the view that the compensation payments made as part of the scheme are not expenses of management within the meaning of that phrase as it has been established by case law and the relevant legislation.