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HMRC internal manual

Corporate Finance Manual

Debt cap: anti-avoidance rules: gateway: effect of anti-avoidance rules applying

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

Section 306

Where all three conditions within TIOPA10/S306 apply for a period of account of the worldwide group the counteraction is that for that period of account the UK group members are required to apply the main debt cap rules as if the gateway test had not been passed. In other words, the period of account will be treated as one for which the UK net debt of the group exceeded 75% of the worldwide gross debt of the group.

The counteraction applies to a particular period of account, and as a result of that the main rules apply to UK members of the group for that period. This is the extent of the counteraction in respect of S306 - it is still necessary to apply the main rules (including, where appropriate, the anti-avoidance rules in TIOPA10/S307 to S310) to determine whether any disallowance under Chapter 3, disregard under Chapter 4 or exemption under Chapter 5 is required.

The scheme may be designed so that the worldwide gross debt is increased for a number of years. For example, a group accounting period ends on 31 December each year. In 2011 several members of the group enter into a scheme to increase the worldwide gross debt by £500 million each year for 2011 until 2016. The scheme is not an excluded scheme. In each of the years ended 31 December 2011 to 2016 the three conditions are met and so in each of those years the period of account of the group is treated as not passing the gateway test.

Alternatively the scheme may be designed so the UK net debt group of the group is decreased for just one period of account and so in this case the counteraction only applies for that period of account.

Where there is a scheme intended to ensure the group does not pass through the gateway, the scheme in its entirety is considered when applying the counteraction. TIOPA10/S306 does not consider whether the scheme can be broken down and elements of it considered non-abusive, nor whether if the scheme had not been entered into a plain vanilla borrowing might have been made instead. Consider the following example.

Example

In 2012 a group makes a major acquisition of another group and requires borrowings of £500 million to fund the takeover. A scheme is designed so that the group raises £800 million by issuing a 10-year bond, using £300 million of the proceeds to invest in special purpose vehicles set up by a bank. The return on the investments in the SPVs is designed to provide a return that represents a fixed return on the £300 million. The companies entering into the scheme have a main purpose of ensuring that the group does not pass through the gateway.

For the year ended 31 December 2012 the group has:

* net UK debt of £500 million.
* worldwide gross debt of £1.6 billion, including the new borrowing of £800 million.

On the face of it the group does not pass through the gateway - the UK net debt does not exceed 75% of the worldwide gross debt. If the scheme had not been entered into the worldwide gross debt would be £1.3 billion as the group would only have new borrowing of £500 million and the group would still not pass through the gateway. But for the purpose of applying S306 (and so in turn calculating whether the gateway test is passed) the whole of the £800 million new borrowing is disregarded. Even disregarding the £800m new borrowing the group still does not pass through the gateway and S306 has no effect.

For the year ended 31 December 2013 the group has:

* net UK debt of £400 million.
* worldwide gross debt of £1.2 billion, including the new borrowing of £800 million.

If the scheme had not been entered into and the group had just borrowed £500 million then the group would not pass through the gateway. The worldwide gross debt would be £900 million. However because there is a scheme, the whole of the £800 million borrowing is disregarded in applying S306 and so the group does pass through the gateway and must apply the debt cap operative rules. The group cannot argue that S306 should only exclude the additional £300 million borrowing in calculating whether the gateway test is passed.

For the year ended 31 December 2014 the group has:

* Net UK debt of £600 million.
* Worldwide gross debt of £1 billion including the new borrowing of £800 million.

If we disregard the whole of the £800 million new borrowing the group will pass through the gateway because the net UK debt would be more than 75% of the worldwide gross debt. In this case even if the scheme had not been entered into the group would have worldwide gross debt of £700 million and would pass through the gateway.