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HMRC internal manual

Corporate Finance Manual

Debt cap: anti-avoidance rules: gateway: excluded schemes

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

Excluded schemes: regulations applicable to the gateway test

Condition C within TIOPA10/S306 is not met if the scheme is an Excluded Scheme.

The Excluded Schemes relevant to the gateway are described in regulations 4 and 5 of SI2013/2892.

Regulation 4 describes the repayment of a relevant liability ([###### This guidance applies to worldwide group periods of account ending before or straddling 1 April 2017.

Excluded schemes: regulations applicable to the gateway test

Condition C within TIOPA10/S306 is not met if the scheme is an Excluded Scheme.

The Excluded Schemes relevant to the gateway are described in regulations 4 and 5 of SI2013/2892.

Regulation 4 describes the repayment of a relevant liability (](https://www.gov.uk/hmrc-internal-manuals/corporate-finance-manual/cfm90710) by a relevant group company (or securitisation company) out of funds derived from sources set out at (a) to (d) in the regulation. These sources of funds are:

  • those derived directly from its trading or investment activity;
  • proceeds from the repayment of a relevant asset ([###### This guidance applies to worldwide group periods of account ending before or straddling 1 April 2017.

Excluded schemes: regulations applicable to the gateway test

Condition C within TIOPA10/S306 is not met if the scheme is an Excluded Scheme.

The Excluded Schemes relevant to the gateway are described in regulations 4 and 5 of SI2013/2892.

Regulation 4 describes the repayment of a relevant liability ([###### This guidance applies to worldwide group periods of account ending before or straddling 1 April 2017.

Excluded schemes: regulations applicable to the gateway test

Condition C within TIOPA10/S306 is not met if the scheme is an Excluded Scheme.

The Excluded Schemes relevant to the gateway are described in regulations 4 and 5 of SI2013/2892.

Regulation 4 describes the repayment of a relevant liability (](https://www.gov.uk/hmrc-internal-manuals/corporate-finance-manual/cfm90710) by a relevant group company (or securitisation company) out of funds derived from sources set out at (a) to (d) in the regulation. These sources of funds are:

  • those derived directly from its trading or investment activity;
  • proceeds from the repayment of a relevant asset (](https://www.gov.uk/hmrc-internal-manuals/corporate-finance-manual/cfm90720) of the company;
  • proceeds from the issue of shares in the company;
  • a dividend from a subsidiary applied in repayment of a liability due to that company or its subsidiary.

This ensures that such normal commercial transactions need not be taken into account in determining whether S306 could apply.  Regulation 7 makes similar provision in respect of the main rules, see CFM92735.

Regulation 5 deals with the release of a liability due by a relevant group company (or securitisation company) on terms where such a release might have been made by a party acting at arm’s length.

The regulations codify the previously applicable guidance, set out below.

Excluded schemes, guidance applicable before the excluded schemes regulations came into force

Examples of the types of schemes that could be excluded from the anti-avoidance rules are because Condition C within TIOPA10/S306 is not met below. It is likely that some groups will not be subject to the anti-avoidance rules in any case if the scheme passes the main purpose test, see CFM92630.

Repaying debt with surplus cash

A relevant group company repays, in whole or in part a relevant liability using cash generated from its own business activities or cash generated from its investments. Cash generated from investments might be from dividends from a subsidiary or from the sale of an investment.

Repaying debt with proceeds from the repayment of a loan asset

A relevant group company has a loan asset (a loan made to another group company or third party, or money placed on deposit) that is repaid, in whole or in part and the company uses the proceeds to repay, in whole or in part a relevant liability.

Debt waiver

A relevant group company has a relevant liability that is waived by the creditor so the debt is extinguished in whole or in part, provided that the waiver is on arm’s length terms.

Capitalisation

A relevant group company has a relevant liability that is repaid using new consideration from the issue of ordinary share capital.

Repayment of an upstream loan

A relevant group company has a relevant liability, and the other party is a subsidiary, and the relevant liability is repaid by the subsidiary paying a dividend to the relevant group company.

For each excluded scheme there are some common conditions that will apply.

In each case the relevant liability must not be replaced, in whole or in part, with any arrangement that:

  • provides a UK group company with a similar deduction that it takes into account in calculating its profits for corporation tax purposes; and
  • is structured so that the arrangement does not constitute a relevant liability.

This condition ensures that the relevant liability in question is not replaced with something similar that would not be treated as a relevant liability.

In addition, in each case, the scheme is treated as an excluded scheme only to the extent of the amount of relevant liability that is repaid or forgiven and not replaced.