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HMRC internal manual

Corporate Finance Manual

From
HM Revenue & Customs
Updated
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Debt cap: anti-avoidance rules: gateway: examples of particular avoidance

The type of schemes that are likely to be caught by the anti-avoidance rules dealing with the gateway rules

The gateway test is a comparison of the UK net debt of a group with the worldwide gross debt of the group. The calculation of the figure of UK net debt will involve both external debt and cash assets of the group’s relevant group companies and any intra-group debt and cash assets. The calculation of the worldwide gross debt will involve the external debt of all members of the group, both UK and non-UK.

The type of schemes that are likely to be caught by the anti-avoidance rule at section 306 are

  • Schemes involving external borrowing, where although there is a commercial purpose for the borrowing, the scheme involves additional transactions which mean more is borrowed than is necessary, with the balance being put on deposit. For example a group needs to borrow $300 million for an acquisition, but the scheme entered into by members of the group involves a borrowing of $500 million and an investment of $200 million that effectively represents a deposit of surplus cash.
  • Schemes where the form of the scheme means there is an amount that would be included as a relevant liability, but the substance of the scheme means there is no actual borrowing.
  • Schemes involving the short-term borrowing of external debt at the accounting year end (commonly referred to as ‘bed and breakfasting’). For example, the group’s year end is 31 December. On 30 December 2012 an overseas group company borrows £500 million and repays it on 1 January 2013; at the end of the year the group does exactly the same - an overseas group company borrows £500 million on 30 December 2013 and repays it on 1 January 2014. This increases the figure of worldwide gross debt by £500 million for the accounting period ended 31 December 2013.
  • Schemes involving the short-term repayment of external or intra-group debt just before the end of the period of account, with the debt being reinstated immediately after the end of that period (again commonly referred to as bed and breakfasting). For example the group’s year end is 31 December. On 30 December 2012 a relevant group company repays an intra-group borrowing of £300 million to its overseas parent and re-borrows the same amount on 1 January 2013; at the end of the year the group does exactly the same - repaying and re-borrowing £300 million over the end of the period of account. This reduces the figure of UK net debt by £300 million for the accounting period ended 31 December 2013.
  • Schemes involving the short-term removal of a relevant group company around the year end. For example a group arranges for a sale and repurchase of a relevant group company with substantial net relevant liabilities for three day periods over the beginning and end of the period of account.