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HMRC internal manual

Corporate Finance Manual

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HM Revenue & Customs
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Deemed loan relationships: shares with guaranteed returns: examples of avoidance schemes

Examples of schemes to avoid CT on interest

This guidance applies to companies that hold shares up to 21 April 2009

The following two examples show in outline how companies could structure arrangements to generate an interest-like return which for tax purposes does not arise as interest.

Scheme 1: shares subject to third party obligations

  • On day 1, a UK special purpose vehicle (SPV) company issues 100m £1 ordinary shares to a bank but only 0.001p/share is actually paid up (i.e. £10k in total). Under the terms of the share issue, the bank is obliged to pay up the balance of the capital (£100m less £10k) in one year’s time, even if it sells the shares in the meantime.
  • On the same day, the bank sells the shares to UK plc (avoider) for their net present value of (say) £95m. At the end of the year, bank pays up the remaining £100m of share capital, so that the value of the SPV shares is then £100m, being the cash it has.
  • The economic effect is that the bank receives £95m from UK plc on day 1, and pays £100m to SPV (owned by UK plc) on day 365. The figures will be such that the £5m difference represents a year’s interest on the initial £95m cash paid by UK plc.
  • The substance is that UK plc has invested £95m for a year and has received £5m of interest, and it is likely that this arrangement will be accounted for as a loan and the profit of £5m shown as interest income.
  • For CT purposes, the only charge would be on a capital gain of £5m (subject to indexation) if UK plc disposes of the shares. It would usually be the case that UK plc would have capital losses to cover the gain.

Scheme 2: other interest-like shares

  • In this scheme, a UK SPV is set up with share capital of £95m and it uses that cash to acquire a debt of £100m due in a year’s time. £95m is the present value of the debt. This is most likely to have been a structured debt set up for the purposes of the scheme (and to avoid problems with the debt going bad).
  • The shares are then sold to UK plc for £95m. UK plc knows the company will be worth £100m in a year’s time.
  • The substance is exactly the same as scheme 1 in that UK plc would earn a fixed profit of £5m in the form of an unrealised capital gain, it is only the mechanism which delivers the pre-ordained increase in value of the SPV’s shares that differs.