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HMRC internal manual

Corporate Finance Manual

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HM Revenue & Customs
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Other tax rules on corporate finance: structured finance: reversal of a relevant effect in a complex case

Reversal of a relevant effect

Where there is a specified effect, section 765 (2) provides that both ITTOIA/PT9 (income tax) and CTA09 (corporation tax) are to have effect in relation to a relevant member of the borrower partnership as if the relevant change had not occurred so that the structured finance arrangement shall not have the effect of excluding the income from charge on, or allowing a deduction to, relevant members of the borrower partnership.

So consider again the example at CFM73170. If the effect of the arrangement is that income that would otherwise have been brought into account on the transferor partner would not be charged to tax, this is one of the specified relevant effects. Accordingly the company will be taxed in relation to the income on the asset as if the arrangement had not been entered into.

Note that in a Condition A case this deeming has effect only in relation to the transferor partner. All other partners will be taxed in accordance with their actual profit shares.

Example

Company A transfers to a newly formed partnership an asset that will produce £120m income over next 5 years. Company B joins the partnership contributing £100m as capital and will take 93.75% of partnership profits over next 5 years (equating to £112.5m, i.e. repayment of the £100m with interest). A will take 1.25%. A third partner C will take the remaining 5%.

Assume that all the section 758 (2) conditions are met i.e. that this is a Condition A case. Company A will then be taxed over 5 years on all £120m of the alienated income. A will not be taxed on its 1.25% profit share because as the transferor partner it is a relevant member of the borrower partnership so is taxed as if the relevant change in relation to the membership of the partnership had not occurred. B and C will be taxed on their actual profit shares since they are not relevant members. A will also receive a deduction for any finance charge shown in respect of the advance in the accounts of the borrower partnership.