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HMRC internal manual

Corporate Finance Manual

From
HM Revenue & Customs
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Debt cap: anti-avoidance rules: general: UK company is not party to particular transactions

A UK company does not have to be a party to transactions that make up the scheme for the anti-avoidance rules to apply

Given the nature of the debt cap rules, it is possible that both the gateway and financial exclusion test in TIOPA10/PT7/CH2 could be passed as a result of schemes entered into by non-UK group companies. It is also possible that the calculation of the available amount could be increased as a result of schemes entered into by non-UK group companies. The rules within Chapter 5 allow financing income received by a UK member of the group from a group company resident in the EEA (apart from the UK) to be exempted where the EEA group company is denied relief for paying that income. It is possible that the UK group company is not party to a scheme that is designed to secure that an amount of financing income is not taxed in the UK.

Each of the three sets of anti-avoidance rules within Chapter 6 tests the purpose of any party entering into the scheme. That party does not necessarily have to be able to directly benefit from the outcome of the scheme, or be the subject of the particular counteraction required where the anti-avoidance rules apply.

Example of a scheme designed to increase the available amount

A back to back arrangement demonstrates how the rules work in such circumstances. Consider an overseas headed group: company A and company B are both members of the group but are not UK group companies. Company A borrows £1 billion from a bank at an interest rate of 3-month LIBOR + 200 basis points (bp) and invests the proceeds in company B, which in turn deposits the money back with the bank receiving interest at 3-month LIBOR + 175bp. The consolidated financial statements of the group will either show the interest payable on the borrowing and the interest receivable on the deposit as separate amounts, or it will show the net cost of the scheme to the group (which is 25 bp per year).

The scheme is designed to increase the available amount for the UK members of the group. For the purposes of calculating the available amount, the interest payable by company A is included but the interest receivable by company B is ignored. The scheme is made up of the borrowing, the investment of company A in company B and the associated deposit. The main purpose of both companies A and B in entering into the scheme is to secure a higher available amount for the UK members of the group. While the group may argue that company A has a commercial purpose for borrowing, the test does not consider company A’s purpose in just borrowing the £1 billion - it considers company A’s purpose in entering into the scheme. The scheme does not produce a profit for the group and aside from tax considerations there is no discernible commercial purpose for company A entering the scheme.

None of the UK members of the group are direct parties to the scheme. They are not involved in the transactions that make up the scheme. They are beneficiaries of the scheme; they stand to benefit from the outcome of the scheme as the increased available amount will reduce and perhaps eliminate the total disallowed amount. However the anti-avoidance rules do not require that the main purpose test has to be satisfied by a party who both enters the scheme and benefits from the scheme.

Consequences for self-assessment

Can a company that benefits from a scheme but is not involved in any of its transactions self assess its corporation tax liability - how does it know it needs to take counteraction? A company, or the person signing the CTSA return, should be aware if any of its finance expense amounts are not included in the tested expense amount; the company should also be aware whether its financing income amounts being taken into account for the purpose of the debt are higher than they ought to be. A company should also be able to enquire whether it is the beneficiary of a scheme to for example increase the available amount. The company should be aware of any schemes that are intended to frustrate the debt cap rules and should ensure that beneficiaries of such schemes are informed.