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HMRC internal manual

Corporate Finance Manual

Deemed loan relationships: repos: tax rules: creditor and creditor quasi-repos: ‘quasi-interest’ avoidance schemes

‘Quasi-interest’ avoidance schemes (CTA09/S547)

This guidance applies up to 21 April 2009

This anti-avoidance provision is aimed at schemes designed to produce non-taxable interest-like returns using arrangements similar to creditor repos and creditor quasi-repos.

The provision applies if all of the following conditions are met:

  • Under an arrangement a person (not necessarily a company) receives any money or other asset (‘the advance’) from a company (or a partnership of which the company is a member).
  • The company does not have a creditor repo or creditor quasi-repo by reference to the arrangement but would have one on ‘the applicable accounting assumption’, and if Condition E of the creditor repo and creditor quasi-repo conditions were read in the light of that assumption.

    • ‘The applicable accounting assumption’ is the assumption that, in accordance with GAAP, the accounts of the company (or partnership of which it is a member) for the period in which the advance is made record a financial asset in respect of the advance.
    • ‘Reading Condition E of the creditor repo and creditor quasi-repo conditions in the light of the applicable accounting assumption’ means that if a financial asset had been recorded in respect of the advance, it would be extinguished by transactions of the type described in Condition E for a creditor repo (CFM46230) or Condition E for a creditor quasi-repo (CFM46240).
  • The arrangement is designed to produce a return (‘quasi-interest’) which equates in substance to the return on an investment of money at interest.
  • The main purpose or one of the main purposes of the arrangement is the obtaining of a tax advantage. ‘Tax advantage’ has the same meaning as in CTA10/S1139.

If these conditions are met, CTA09/S547 has effect as if the company had a creditor repo, and as if the quasi-interest were an amount deemed to be interest under that provision (CFM46270).

This rule is unlikely to be relevant where the purchase and sale of the shares is taken into account in computing the lender’s trading profits, because there is unlikely then to be any tax advantage. Similarly the rule will not apply where the interest-like return is taxable as income under any other provision (such as the shares as debt rules in CTA09/PT6/CH7), since in that case no tax advantage can arise.

The ‘disguised interest’ rules apply from 22 April 2009

Where a company becomes party to an arrangement on or after 22 April 2009, the new ‘disguised interest’ rules apply instead of the anti-avoidance rule in CTA09/S547 (CFM42020). FA09/SCH24/PARA8 repeals CTA09/S547 and FA09/SCH24/PARA13 provides that the disguised interest rules also apply to arrangements entered into before 22 April 2009 to which CTA09/S547 applied before its repeal.