Debt cap: anti-avoidance rules: main rules: conditions for anti-avoidance rules to apply
This guidance applies to worldwide group periods of account ending before or straddling 1 April 2017.
There are three filters for the anti-avoidance rules dealing with manipulation of the rules in TIOPA10/PT7/CH3 and CH4
The anti-avoidance rules covering schemes that involve manipulation of the rules within Chapters 3 and 4 of the debt cap schedule are contained within sections 307 to 310. Chapter 3 contains the rules that calculate whether there is a disallowance to be made under the debt cap. Chapter 4 contains the rules that allow for the reduction of financing income received by UK group companies where a disallowance has been made.
There are three conditions for the anti-avoidance rules to apply:
- Condition A - a scheme is entered into at any time before the end of a period of account of the worldwide group and the main purpose of the party entering into the scheme is to ensure that the relevant net deduction (see CFM92700) that arises from the scheme is lower than the figure would be if the most likely alternative arrangement were in place instead of the scheme.
- Condition B - the result of the scheme is that the UK corporation tax profits of the UK group companies are less than they would otherwise be or the corporation tax losses of the UK group companies available for carry back or carry forward are higher than they would otherwise be.
- Condition C - the scheme is not an excluded scheme.
Both conditions A and B rely on establishing what would have happened if the scheme had not been brought about and require a comparison with the counterfactual - the most likely thing to have happened in absence of the scheme.
The aim of condition B is to filter out transactions and arrangements that would be treated as a scheme (because that term has a very wide meaning), and which are motivated by the desire to eliminate or reduce the impact of the debt cap legislation, but which do not result in any loss of tax to the Exchequer. This is most likely to happen if a group unwinds structures that previously resulted in ‘excessive’ interest deductions in the UK, or intra-group financing in the UK that remain for just historical reasons, thereby removing the deduction for the finance expense completely, rather than just for debt cap purposes.
For example, if a UK subsidiary issues new shares to its overseas parent and uses the money from the new consideration to repay an existing intra-group loan from the parent, then it has reduced the tested expense amount. This is a scheme and both the UK subsidiary and overseas parent could have entered into the scheme with the main purpose of reducing the relevant net deduction to a figure lower than it would have been had the debt been left in place, so meeting condition A. Note it is by no means automatic that condition A is met. On the facts of any particular case it is possible the parent had a predominant commercial purpose in capitalising the UK subsidiary with equity rather than debt.
Even where condition A is met, however, by implementing the scheme the group has reduced the finance expenses that can be claimed by the UK subsidiary as a deduction in calculating its corporation tax profits. While the debt cap rules might not apply as a result of the scheme, there is no avoidance as the UK is now paying more corporation tax as a result of the restructuring of the intra-group debt.