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HMRC internal manual

Corporate Finance Manual

Other tax rules on corporate finance: structured finance: avoidance background

Background to the avoidance schemes leading to the legislation

A person whose income derives from contracts where the amounts arising from year to year are predictable may wish to borrow money. Where that person obtains finance by way of loan from a finance provider (likely to be a bank) he normally gets tax relief for the interest shown in its accounts but not for the principal. Correspondingly, he is not taxed on receipt of the lump sum advance.

But there are other ways in which the finance could be obtained. In the basic version of the avoidance scheme, the person (referred to in the legislation as ‘borrower’) makes a disposal of an asset on which there is a predictable income stream in return for a lump sum from another person (referred to in the legislation as ‘lender’). The lump sum is equal in amount to the present value of the future income that the lender will now receive so that lender will receive amounts which repay both the lump sum and interest. There are likely to be arrangements such as options under which the asset and income reverts to the borrower at the end of the arrangements.

For tax purposes it will be claimed that the income arising during the period of the arrangement is not taxable on the borrower because he has disposed of the asset albeit temporarily. It will also be claimed that the lump sum is a capital receipt either giving rise to a gain subject only to the provisions of TCGA or not taxable at all. The aim of the arrangements is to give effective tax relief to ‘borrower’ not only for the finance charge (i.e. interest) but also the principal of the loan.

Compare the two examples at CFM73030 where a company wishes to obtain finance of £100m over 5 years.