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HMRC internal manual

Corporate Finance Manual

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HM Revenue & Customs
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Debt cap: intra-group short-term debt: anti-avoidance rule

Schemes or arrangements that exploit the short-term debt rules

Regulation 4 of The Corporation Tax (Exclusions from Short-Term Loan Relationships) Regulations contains an anti-avoidance rule that deals with schemes or arrangements that look to meet a long-term funding requirement through a sequence of short-term finance arrangements. Regulation 4 provides that a sequence of finance arrangements, that are otherwise short-term loan relationships, is to be treated as though it is a single finance arrangement made for a long-term funding purpose if the following two conditions are met.

  • The sequence of finance arrangements when taken together are settled or terminated more than 12 months after the start of the funding requirement, and
  • the sequence of finance arrangements are part of a scheme or arrangement the main purpose, or one of the main purposes of which is to characterise a loan relationship as a short-term loan relationship for the purposes of TIOPA2010//S319.

The main purpose test considers why the scheme or arrangement is structured with a sequence of finance arrangements. The purpose of the parties in entering into the respective finance arrangements may be for genuine business reasons (in that the borrowed money is used for business purposes and not an avoidance scheme). This is not the decisive factor.

The term ‘sequence of finance arrangements’ is not defined. ‘Sequence’ takes its ordinary meaning and does not mean that one finance arrangement must follow another seamlessly. Neither does it mean that the sequence must involve the same parties. The borrowing requirement might involve a change of lender, or a lending being routed via one or more other parties. The following examples provide some indication of the type of schemes or arrangements that might be caught.

Example 1

Company A issues a three-month loan note to another group company B. At the end of three months, the note is rolled over into a further three-month note. This happens repeatedly, over a period of more than a year. Company A claims that no long-term funding purpose is present, and there is no expectation that the loan note will be rolled over; the funding position is reviewed at the end of each three-month period and the decision to renew the borrowing has been taken for separate, independent reasons on each occasion. If, however, there is evidence that the sequence of loan notes is part of an arrangement, a main purpose of which is to put companies A and B in a position to make a section 319 election, the borrowing will nevertheless be treated as having a long-term funding purpose.

Example 2

The facts are as in example 1 except that, at the end of each three-month period, company A takes out a 7-day loan from an external bank in order to repay the loan note. After 7 days, it issues a further loan note to company B, and uses the proceeds to repay the bank borrowing. The finance arrangements form a sequence, notwithstanding that two different lenders are involved (one of whom is external to the group), and regulation 4 will apply if the requisite main purpose is present.

Example 3

Company C has a long-term funding requirement that is satisfied by a repayable on demand loan from company D. Company D, in turn, borrows from company E through a series of short-term loans from company E. Company D claims that it has no long-term funding requirement, since it could ask company C to repay the loan at any time. However, if a main purpose of structuring its borrowing from E as a series of short-term loans (rather than matching the terms of its lending to C) is to enable D to characterise each separate loan as a short-term loan relationship, regulation 4 will apply.