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HMRC internal manual

Corporate Finance Manual

Debt cap: anti-avoidance rules: gateway: non-abusive schemes

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

The type of transactions and arrangements that are unlikely to be considered as a scheme to manipulate the rules within Chapter 2 of the debt cap

The excluded schemes filter will provide details of schemes that meet specific conditions that would clearly be the type of arrangements not intended in any way to manipulate the gateway test. However, it is impractical and difficult to define every type of scheme that is not entered into to manipulate the gateway test.

Schemes involving the worldwide gross debt

Any external borrowing by a member of the group will increase the worldwide gross debt of the group. In some cases the group may already pass the gateway on the basis of its existing borrowings; in this case Condition A is not met and so the anti-avoidance rules don’t apply. In other cases the new borrowings may increase the worldwide gross debt to an extent that the gateway test is passed with the new debt, but would not be passed without it. Condition A is met but Condition B (the main purpose test) may well not be.

If the group is increasing its external borrowings it will be doing so for a reason; the money borrowed will be put to use and there will normally be a commercial purpose behind that use. Provided the group is not implementing a scheme that has the concurrent purpose of manipulating the gateway test rules - and it should be clear to UK tax managers if this is the case - UK group companies will not need to consider the application of TIOPA10/S306.

The following examples provide some indication of the type of transactions and arrangements where HMRC considers that the anti-avoidance rule is unlikely to apply.

  1. The various group companies may have overdrafts. These will be used to fund the day to day commercial activities of those companies and are unlikely to be used primarily to increase the worldwide gross debt. Even where such borrowings might be held to constitute a scheme, HMRC would not challenge the arrangements unless there was some other evidence of abuse.
  2. The group may be making an acquisition or borrowing to raise funds to buy back shares in the group. While the borrowing and associated acquisition (or share buy-back) constitutes a scheme, there is a clear commercial purpose which is very likely to be the only or main purpose of a particular company entering into that scheme. There is only likely to be another main purpose if for example the borrowing is structured so that the amount of principal is larger than it would otherwise be and part of the scheme ensures that in substance the group only borrows the amount it needs. For example the 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. In this case there may well be an additional main purpose associated with avoiding the debt cap rules. However, each case will turn on its own facts - for example, the group might be able to demonstrate that, when it entered into the scheme, it had a longer-term commercial purpose for the $200 million, to which any debt cap considerations were no more than incidental.
  3. Existing borrowings are very unlikely to be schemes that have been entered into by parties with the purpose of enabling the group to pass the gateway test. However where borrowings have been made following publication of Finance Bill 2009 there is more likelihood of the opportunity for a party having a main purpose of avoiding rules set out in that Bill.

Schemes involving UK net debt

The calculation of the UK net debt figure will involve both external debt and cash assets of the relevant group companies and any intra-group debt and cash assets. As discussed above, increasing external debt and decreasing external cash assets are very likely to have a commercial purpose and so Condition B, the main purpose filter, is unlikely to be met in respect of schemes involving such transactions.

A commercial purpose may be absent from schemes that involve intra-group transactions. Many groups have a complex web of intra-group borrowings and some of these probably serve no practical purpose; they may relate to takeovers or reorganisations undertaken a number of years ago and have simply been left in-situ, rather than being unwound. Groups may decide to carry out a house-keeping exercise to reduce intra-group borrowings, particularly UK to UK intra-group borrowings in order to reduce the UK net debt figure and so meet the gateway test.

In these cases, it is likely that Condition B will be met, as the main purpose of the UK companies entering into the scheme to reduce the intra-group borrowing will be to ensure the group passes the gateway. In a number of cases, however, there would be no debt cap disallowance under the main rules: the object of the exercise is to reduce administrative burden by ensuring that the gateway test is met. Unwinding redundant structures in such circumstances is not in itself objectionable.