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HMRC internal manual

Corporate Finance Manual

Other tax rules on corporate debt: group mismatch schemes: the conditions

CTA10/S938B defines a Group Mismatch Scheme (GMS). A scheme is a GMS if the parties to it are, or include, members of the same group (referred to as ‘the scheme group’) and either condition A or B is met.

Condition A

Condition A is that, at the time the scheme is entered into, there is no practical likelihood that the scheme will fail to secure a relevant tax advantage (CFM77580) of £2million or more.

‘No practical likelihood’ is not defined, and will take its everyday meaning taking into account all of the facts. However, a condition put in purely to attempt to avoid the “no practical likelihood” test will not be effective, following the judgment in the House of Lords in Scottish Provident Institution 76 TC 538.  In that case, it was ruled that an avoidance scheme did not work, even though the parties had “deliberately included a commercially irrelevant congency, creating an acceptable risk that the scheme might not work as planned.” 

Condition B

Condition B is that the purpose, or one of the main purposes, of any member of the scheme group entering into the scheme is to obtain the chance of securing a relevant tax advantage (of any amount) and at the time the scheme is entered into there is no chance that the scheme will secure a relevant tax disadvantage or, if there is such a chance, the expected value of the scheme is still a positive amount.

Condition B, unlike condition A looks at the purpose of the companies in being party to the arrangements. Again, this is a question of fact.

See CFM38120 onwards for guidance what factors should be taken into account in determining a company’s purpose.

Further guidance on how to establish purpose and the distinction between purpose and motive can also be found in the Business Income Manual at BIM37050 onwards.