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HMRC internal manual

Corporate Finance Manual

HM Revenue & Customs
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Loan relationships: tax avoidance: unallowable purpose: application

Applying the unallowable purposes rule

The application of this provision is a matter for careful judgement, and was referred to by the Economic Secretary when this provision went through report stage. Her comments are recorded in Hansard and reproduced in full at CFM38170.

It can be seen that those comments were primarily concerned with the tax avoidance purpose test in CTA09/S442(3) & (4), although brief reference is made to S430(3) in the last two sentences of the second paragraph.

HMRC officers should not apply the provision without reference to Anti Avoidance Group or Business International, see CFM38200.

You will note from the Economic Secretary’s comments that SS441-442

  • will normally apply where UK branches of overseas companies borrow for overseas activities outside the UK tax net,
  • will not normally apply where a company borrows to acquire shares in companies, whether in the United Kingdom or overseas, or to pay dividends, provided that the borrowings are not structured in an artificial way. And a similar view is taken as regards borrowings, whether from a third party or intra group, to acquire other business assets whether located in the United Kingdom or overseas. This approach is not affected by the substantial shareholdings rules, and
  • will not normally apply where a company is choosing between different ways of arranging its commercial affairs, if it chooses the course that gives a favourable tax outcome, provided that tax avoidance is not the object, or one of the main objects, of the arrangements.