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HMRC internal manual

Corporate Finance Manual

Other tax rules on corporate finance: securitisation: periods beginning on or after 1 January 2007: the unallowable purposes rule

Unallowable purposes

Regulation 12 sets out the unallowable purpose rules under which a company is excluded from the securitisation regime if it has, or at any time has had, an unallowable purpose.

An unallowable purpose is one where the purpose for which the company is party to the CMA, or a ‘related transaction’, or a transaction ‘in pursuance of’ the CMA, is not amongst the business or other commercial purposes of the securitisation company.

‘Related transaction’ here takes its meaning from Regulation 2 and refers to a case where, as regards any ‘arrangements’, it would be reasonable to assume that the transactions in question would not have been entered into but for those ‘arrangements’. Related transactions can include those between parties to different CMAs or between persons who are not party to any CMA.

A tax avoidance purpose (meaning one aimed at securing a tax advantage within ICTA88/S840ZA for any person other than the securitisation company itself) is a business or other commercial purpose only where it is not the main purpose, or one of the main purposes, of the arrangements or transaction.

Whether a tax avoidance purpose is the main, or one of the main, purposes is a question of fact which depends on all the circumstances of the particular case. The test is similar to the unallowable purposes rule in the loan relationships legislation (CTA09/S441). (CFM38100)

This anti-avoidance rule is a ‘once tainted, always tainted’ rule in that if the test is failed in any accounting period the company will be permanently excluded from the regime. This is to avoid the situation where a company contrives to fail the test when it has a loss, and does not wish to be taxed on the basis of the special tax charge in Regulation 14. For example, it might seek to do so by inserting a transaction that is ‘not amongst the business or other commercial purposes of the securitisation company’.

‘Unallowable purpose’ is a test which is applicable to the company for the purposes of the securitisation company regime. A company will not be excluded from the regime (under the ‘backward-looking’ element of Regulation 12) solely because it had an unallowable purpose under some other part of the Taxes Acts before it entered the regime.