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HMRC internal manual

Corporate Finance Manual

HM Revenue & Customs
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Deemed loan relationships: shares with guaranteed returns: interaction with arbitrage rules and capital gains

Interaction with other tax rules

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

Arbitrage rules

F(2)A05/S24 to S31 introduced rules to combat UK tax avoidance involving arbitrage. Guidance on arbitrage is available on the HMRC web-site.

It would theoretically be possible for a transaction to fall within both the arbitrage receipts cases rules and shares as debt rules at the same time. The arbitrage rules deal with this by giving priority to the shares as debt rules.

F(2)A05/S26(10) provides that a receipt is not within the arbitrage receipts rules to the extent that it is taken into account in determining the debits and credits to be brought into account by a company for the purposes of loan relationships as respects a share in another company by virtue of CTA09/PT6/CH7.

For example, if company A receives a payment of 100 which would fall to be taxed under the arbitrage rules, but that payment is taken into account in computing the credits to be brought into account under either FA96/S91A or S91B on company B which holds the shares in company A, then there is no Case VI charge under F(2)A05/S26 on company A.

It does not matter whether the measure of the two charges are the same, as long as the payment or part of the payment is taken into account in a charge under CTA09/PT6/CH7. Given that the shares as debt charges are calculated by reference to fair value accounting rather than on a receipts basis, it is quite likely the measures under the two regimes would be different for the accounting period of receipt.

Capital gains

Where schemes are in existence at Budget Day (16 March 2005), it is possible that the effect of FA96/S91G is that some or all of a payment will be reflected in a capital gain rather than a loan relationship credit.

For example, company A receives a payment of 100 on 31 March 2005, being the last day of its accounting period. As the payment was received on or after 16 March 2005, it is potentially within the arbitrage receipts cases rules. However, if the receipt means that the shares in company A are within S91B as respects company B (company A’s shareholder), then the interaction between the two sets of rules has to be considered. S91B works by fair value accounting, and there is a deemed disposal and reacquisition of the company A shares by company B on 16 March 2005. If the fair value of the shares on that date reflects, say, 90 of the 100 payment, then only 10 of the 100 will be taxed as a loan relationship credit. The remaining 90 will be reflected in the capital gain calculated as at 16 March 2005 (although held-over until a later date). HMRC will however accept that the 90 is treated as an amount taken into account in computing the debits and credits brought into account for loan relationships purposes.