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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 debt: group mismatch schemes: meaning of relevant tax advantage

CTA10/S938D defines a ‘relevant tax advantage’. The economic profit must be one that is made by the scheme group, not an individual company. It is determined over the whole scheme period and arises from asymmetries in the way that different members of the scheme group bring debits and credits into account under the loan relationship or derivative contract rules. The legislation will not apply where this economic profit is negligible.

A relevant tax disadvantage is defined as an economic loss that is made by the scheme group over the scheme period that arises as a result of asymmetries in the way different members of the scheme group bring, or do not bring, debits or credits into account. The legislation will not apply where this economic loss is negligible.

The definition makes clear that an economic profit includes an increase in economic profit and a decrease in an economic loss. This ensures, for instance, that arrangements involving partnerships where not all of the partners are group members (so that the scheme is not pre-tax economically neutral for the group) may be within the scope of the rule; as may schemes that involve the payment of loan relationship or derivative contract expenses to third parties. It does not include profits that are negligible.

The requirement that the profit arises from asymmetries means that losses or profits on genuine third party loans or derivatives that might be part of a scheme (for example a loss arising from interest on money borrowed from a third party that is used to fund a scheme) cannot be scheme losses or profits. This is because such losses or profits cannot affect the amount of any relevant tax advantage because they cannot produce intragroup asymmetries.

For the purposes of establishing the relevant tax advantage an asymmetry includes, but is not limited to, asymmetries related to quantification and timing.

Some avoidance schemes attempt to avoid the GMS legislation by providing for an asymmetry to arise between a company which is a member of the group and another entity, such as a partnership, so that the mismatch is not between two different companies. In these cases, the tax mismatch legislation in CTA10/S938O to 938V may apply instead (CFM77710).