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HMRC internal manual

Corporate Finance Manual

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HM Revenue & Customs
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Debt cap: anti-avoidance rules: general: main purpose test

Establishing what a party’s main purposes are in entering into a scheme

Each of the three sets of anti-avoidance rules within Chapter 6 have a purpose filter. The anti-avoidance rules do not apply unless a party has a main purpose of entering into a scheme to secure a particular outcome that frustrates the intention of the debt cap rules.

Each of the three sets of rules consider whether any party to a scheme has a main purpose, on entering into a scheme, to secure a particular outcome. The term ‘secure’ means to obtain the desired outcome. It does not mean that the anti-avoidance rules can only apply to cases where the group believes it is beyond doubt that the scheme will achieve the desired outcome.

A party does not have to be a member of the group to enter into a scheme with a main purpose of frustrating the debt cap rules; it is possible that an unconnected party’s involvement in a scheme could trigger the anti-avoidance rules.

The filter considers the purpose of parties entering into the scheme, not just the purpose in being involved say, in just a single transaction that forms part of the scheme. In the case of a back to back arrangement, for example, a company may have one purpose in putting cash on deposit with a bank, but a different purpose in entering into the overall scheme that is intended to borrow money and deposit it back with the aim of increasing the available amount.

Nor is there any requirement for each and every party to transactions within the scheme to have a main purpose of frustrating the debt cap rules. For example, suppose company A devises such a scheme, which involves making loans to its subsidiaries B and C. The directors of B and C are aware of a commercial purpose to the loans, but are not told about the tax implications. Provided company A has entered into the scheme with a requisite main purpose, the ‘any party’ condition is met, notwithstanding that companies B and C can honestly disavow such a purpose for themselves.

There are three questions to answer when considering the main purpose filter:

1. Has a party entered into a scheme?

To enter into a scheme the party has to be involved in an arrangement or transactions that are part of the scheme. The party does not have to be involved in all the arrangements or transactions, but there does need to be some form of participation in the arrangements or transactions.

2. What is that party’s purpose in entering the scheme; is it to obtain an advantage defined in one of the three sets of rules?

This is a question of fact. There is detailed guidance on establishing what is purpose and evidence of purpose in guidance for anti-avoidance purpose tests.

3. Is that purpose a main purpose?

Again it is a question of fact as to whether the purpose of obtaining an advantage to prevent the debt cap rules applying in the intended way is a main purpose. Where that purpose is the party’s only purpose in entering into the scheme then it will be the main purpose. Where the party has more than one purpose in entering the scheme, all the purposes have to be considered and a decision taken as to whether the purpose of frustrating the debt cap rules is a main purpose. A party may have more than one main purpose in entering the scheme.

For example, an overseas group company may have existing borrowings of $500 million and had a sole commercial purpose for borrowing. The company enters into a scheme whereby the $500 million is repaid; the equivalent US dollar amount is borrowed in a weak currency (at a commensurately high rate of interest) and swapped back into US dollars by means of a cross-currency swap. Overall the substance of the various transactions making up the scheme is a $500 million borrowing, but in form the interest payable by the company is much higher, increasing the available amount. The company may well still have a commercial purpose in borrowing and a commercial purpose in entering into the financial instrument to ensure the overall effect is US dollar borrowing. Overall there may be a commercial purpose in the scheme - effectively to borrow $500 million. However the company would appear to have another purpose in entering into the scheme, particularly a scheme structured in that way. That other purpose is to increase the available amount and that may well be a main purpose.

The presence of a commercial (non-tax) purpose does not preclude the existence of a main tax purpose. All the purposes have to be considered.