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HMRC internal manual

Corporate Finance Manual

HM Revenue & Customs
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Debt cap: anti-avoidance rules: main rules: calculating the counterfactual

The factors to take into account when deciding what is the most likely alternative to the scheme

In deciding what is the most likely thing to have happened, the key word is likely. At one end of the spectrum it does not mean arrangements that end up with the largest amount of corporation tax profits possible. At the other end of the spectrum it does not mean another scheme designed to frustrate the debt cap rules.

In many cases, the most likely alternative will be maintenance of the status quo, in other words what was in place before the scheme was implemented. For example, if ‘plain vanilla’ group financing is replaced by more elaborate financing structures in order to achieve a particular tax purpose, it is probable (although not inevitable) that - in the absence of the scheme - the group would have continued the ‘plain vanilla’ finance.

More complex issues will arise where arrangements are directed towards a commercial end (for example, raising new finance in connection with an acquisition, or securitising a future income stream) but are carried out in such a way as to give a ‘debt cap benefit’, and this is a main purpose. It will be necessary to consider how the group would have achieved the same commercial end had the debt cap not been a factor.

Determination of ‘the most likely alternative’ should, so far as possible, be based upon contemporaneous evidence, and HMRC staff should examine critically any assertions by groups about what they might have done where these are not supported by evidence. Relevant evidence will include any business plans or financial projections put into place before the scheme was conceived or advised to the group, and documentation relating to any transactions or arrangements that were cancelled or unwound in order to implement the scheme.

Other relevant factors will include (but are not limited to) the following:

  • Legal and regulatory requirements applying to the group and its business.
  • The company’s treasury policies and procedures. If arrangements that are proposed as ‘the most likely alternative’ would require particular internal approvals, how likely is it that such approval would have been given (or, indeed, sought)?
  • Costs and benefits (including fees and other incidental costs) associated with particular alternative arrangements.
  • The risks associated with possible alternative arrangements, particularly in the light of the group’s stated risk management policies. For example, if a group’s policy is to hedge all significant currency exposures, a course of action that involves a large unhedged FOREX exposure will not, on the face of it, be a likely alternative.
  • The types of structures, financing arrangements or transactions that are ‘normal’ for the group.
  • The tax consequences (other than the effect on the ‘relevant net deduction’ for debt cap purposes) of alternative arrangements.

The last bullet point is likely to be particularly relevant where it is claimed that condition B (CFM92710) is not satisfied because, under the ‘most likely alternative’ the CT profits of relevant group companies would have been the same, or more. In general, groups will arrange their affairs in the most tax-efficient way. This is not to say that a projected alternative scenario that involves (for example) a company disclaiming capital allowances, or accelerating the recognition of profit in some other way, could never be the ‘most likely’, but HMRC staff should look carefully at the evidence in such cases.

There may in some cases be more than one possible alternative. In this case you will need to consider the probability of each alternative being put in place, comparing each with the other.