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HMRC internal manual

Corporate Finance Manual

Debt cap: anti-avoidance rules: general: definition of a scheme

This guidance applies to worldwide group periods of account ending before or straddling 1 April 2017.

The anti-avoidance rules are applied to schemes entered to frustrate the debt cap measure

Each of the three sets of anti-avoidance rules within TIOPA10/PT7/CH6 is based around consideration of a ‘scheme’.

The term ‘scheme’ is not exhaustively defined, but the rules do set out much of what is covered by the term. TIOPA10/S312(1) provides that for the purpose of Chapter 6 the term ‘scheme’ includes any scheme, arrangements or understanding of any kind whatsoever and makes it clear that a scheme does not have to be legally enforceable. A scheme might involve a single transaction or it might involve any number of transactions.

The term ‘scheme’ therefore has a very wide meaning. It does, however, imply an underlying unity of purpose or execution. This does not mean that all of the component transactions must be executed, or even planned, at the same time. It is possible for an existing arrangement or financial instrument to be utilised as part of a scheme. But commercial decisions made by a company, or a number of companies in a group, will not constitute a scheme if each decision is made solely on the basis of facts and circumstances at the time, without any underlying ‘master plan’. For example, if companies within a group draw from time to time on a bank facility in order to meet their requirements for working capital, the drawings would not constitute a ‘scheme’ merely because they are all governed by the same facility agreement.

The term ‘transaction’ is not specifically defined and therefore takes its normal dictionary meaning of something performed or carried through. Repaying a loan, incorporating a new company or taking steps to locate the central management and control of a company in another territory are all examples of transactions.

It might be argued that a unilateral act cannot be a ‘transaction’, and that the word implies an agreement or deal between two or more persons. Even if this argument is correct, however, anything undertaken by a company is likely to involve agreement between natural or legal persons. The requirement in each of the three constituent provisions within Chapter 6 is simply that ‘a scheme is entered into’. The legislation does not specify who should enter into the scheme. In particular, there is no requirement for the company whose tax affairs are under consideration to be a party to all - or indeed, any - of the transactions that together make up the scheme.

The term ‘arrangement’ has been considered in relation to other legislation, both with regard to tax and otherwise, and has consistently been found to mean something less than a binding contract or agreement, something in the nature of an understanding which may or may not be legally binding. All that is required to constitute an arrangement not enforceable in law is that the parties to it shall have communicated with one another in some way and that as a result of that communication each has intentionally raised in the other an expectation that he will act in a certain way.