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HMRC internal manual

Corporate Finance Manual

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Loan relationships: tax avoidance: overview: unallowable purpose and non-arm’s length transactions

Tax avoidance rules: overview

CTA09/PT5/CH15 contains the main tax avoidance provisions in the loan relationships regime. There are also tax avoidance rules outside the CTA09 which are relevant to loan relationships.

There are similar provisions relating to derivative contracts in CTA09/PT7/CH11 (CFM56000).

Unallowable purposes

The key anti-avoidance provision is the ‘unallowable purposes’ rule, previously in FA96/SCH9/PARA13, and now at CTA09/S441 to S442. See the guidance at CFM38100.

Operational responsibility for the application of the unallowable purposes rule lies with CTIAA (Anti-Avoidance Group). Cases should be referred as appropriate.

Non-arm’s length transactions

There are anti-avoidance rules to cover cases in which transactions are not on arm’s length terms. These rules were originally at FA96/SCH9/PARA11, and are now at CTA09/S444 to S446. See the guidance at CFM38400.

The application of these rules has been superseded in many cases by the transfer pricing rules in ICTA88/SCH28AA - see the International Manual at INTM430000 and INTM560000.

Non-arm’s length transactions: foreign exchange

The original FA 1993 forex regime restricted the tax relief available to companies for exchange losses which arose on debts held as a result of transactions that were not on arm’s length terms. Where the company, if it had been dealing on arm’s length terms,

  • would not have made a loan or acquired a debt at all, or
  • the debt would have been on different terms, or in a different amount,

then it could only set off exchange losses against future exchange gains arising on the same debt.

FA 2002 repealed these provisions and inserted new rules at FA96/SCH9/PARA11A, which is now CTA09/S447 to S452. It disregards both exchange losses and exchange gains, either wholly or partially, in the prescribed circumstances. See the guidance at CFM38500.

There are also a number of other anti-avoidance rules relating to loan relationships - see CFM38020.

Wherever these anti-avoidance rules are begin considered, you should refer the case to CTIAA (Financial Products Team) before issuing a closure notice.