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HMRC internal manual

Corporate Finance Manual

Loan relationships: tax avoidance: regime anti-avoidance rule: principles underlying the regime

CTA09/S455D and S698D

As already noted, arrangements are not relevant avoidance arrangements (see CFM39530) where they are made in circumstances in which, it is reasonable to regard that the provision in question was intended to apply.

Whether or not particular arrangements fall within those situations is ultimately a question of fact. However, S455D and S698D provide some pointers. They outline a series of generic outcomes or scenarios which, if present, are likely to indicate that arrangements should not be excluded from being relevant avoidance arrangements. These indicators are neither exhaustive nor determinative. They are concerned with situations in which the exclusion may not apply; they do not directly address situations in which it would be available. If none of the indicators in S455D(1) or S698D(1) apply, it will be more likely that the exclusion will be in point, but whether the requirements of S455C(4) or S698C(4) are actually met remains a question of fact.

S455D(2) and S698D(2) qualify the application of the examples in subsection (1) of each section. An example outcome cannot be taken as an indication that the S455C(4) or S698C(4) exclusion should not apply if it is reasonable to assume that, when the particular provisions engaged by the arrangements in question were enacted, it was expected (and therefore intended) that they would give rise to an outcome within the scope of the examples in S455D(1) or S698D(1). 

Both S455C(4) and S455D(2) - and the Part 7 equivalents - are concerned with the intentions behind the Part 5 or Part 7 provisions relevant to particular arrangements, but they fulfil different roles. S455C(4) and S698C(4) provide a filter: if the exclusion applies, there are no relevant avoidance arrangements, so the anti-avoidance rules cannot operate. Separately, the examples in S455D(1) and S698D(1) are concerned with, but do not decide, the question of whether the exclusion is in fact available. However, S455D(2) and S698D(2) ensure that the examples do not form part of the consideration of that question if the result achieved by the arrangements was one intended or aimed at by the legislation under which the tax advantage arose.


Arrangements unlikely to be excluded from being relevant avoidance arrangements

The examples in S455D(1)(a)-(b) and S698D(1)(a)-(b) indicate that where arrangements result in the elimination or reduction of taxable profits or the creation or increase of tax losses or expenses, and where this is not in line with the economic outcomes, the arrangements are, subject to S455D(2) or S698D(2), unlikely to be consistent with the principles or policy objectives of a provision of Part 5 or Part 7, and the S455C(4) or S698C(4) exclusion is unlikely to apply. This reflects the fundamental purpose of Parts 5 and 7, which is to tax all profits arising to a company from its loan relationships or derivative contracts, as set out in CTA09/S295 and S306A and the Part 7 equivalents.

The example in S455D(1)(c) and S698D(1)(c) indicates that arrangements resulting in amounts not being recognised as items of profit or loss in accounts, or recognition being delayed, are unlikely to be subject to the S455C(4) or S698C(4) exclusion. It makes clear that the anti-avoidance rules are capable of countering effects on the amount or timing of credits and debits under Part 5 or Part 7 that arise for example from the contrived amendment of amounts recognised in accounts.

The example in S455D(1)(d) and S698D(1)(d) concerns arrangements that seek a tax advantage by using accounting rules to contrive the resulting accounting treatment of an amount which would otherwise give rise to a Part 5 or Part 7 credit or debit by juxtaposing it with another transaction. Under accounting rules the presentation of an amount within the scope of Part 5 or Part 7 may be influenced by the existence of another transaction or instrument (which may not be within Part 5 or Part 7). Where arrangements have a main purpose of obtaining a tax advantage in this way, they are unlikely to be excluded from being relevant avoidance arrangements. In such a case, the adjustments made under the regime anti-avoidance rules should reflect the amount in question as if it had been accounted for in isolation. 

The examples in S455D(1)(e)-(f) and S698D(1)(e)-(f) are concerned with arrangements which seek a one-way effect in respect of exchange and fair value gains and losses, so that no taxable gain would arise (or would arise in a lesser amount) while the full amount of a loss could nonetheless be claimed. These are circumstances of the kind previously addressed, in the context of exchange gains and losses, by the now repealed ‘one-way exchange effect’ rules in CTA09/S328 and S328A-S328H, and S696(4E) and S606A-S606H. The repealed rules are described at CFM63120+ .

The example in S455D(1)(g) deals with arrangements that seek to circumvent the intentions behind the provisions of Chapter 4 of Part 5, which broadly seek to achieve tax neutrality where loans are transferred within a corporate group. It will be relevant where, in such circumstances, the arrangements seek an overall reduction in the credits or an overall increase in the debits brought into account. This example is not relevant to derivative contracts and does not appear in S698D(1).

The example in S455D(1)(h) is concerned with situations where a debit in respect of an impairment loss or release on debt between connected parties would be brought into account when, but for the arrangements, the provisions of Chapter 6 would have prevented this. This example is not relevant to derivative contracts and does not appear in S698D(1).