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HMRC internal manual

Corporate Finance Manual

Debt cap: anti-avoidance rules: main rules: excluded schemes: general

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

Position where the Excluded Schemes Regulations apply

Condition C within TIOPA10/S307(4) is not met if the scheme is an excluded scheme. Excluded schemes for the purposes of TIOPA10/S307-310, ‘Schemes involving manipulation of the rules in Chapters 3 and 4’, are dealt with in regulations 6 to 11 of SI 2013/2892.

Regulation 7, ‘repayment of a financing arrangement’, is similar to regulation 4 (which deals with the gateway test, see CFM92670).  It describes the repayment of a financing arrangement 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.

Position where the Excluded Schemes Regulations apply

Condition C within TIOPA10/S307(4) is not met if the scheme is an excluded scheme. Excluded schemes for the purposes of TIOPA10/S307-310, ‘Schemes involving manipulation of the rules in Chapters 3 and 4’, are dealt with in regulations 6 to 11 of SI 2013/2892.

Regulation 7, ‘repayment of a financing arrangement’, is similar to regulation 4 (which deals with the gateway test, see CFM92670).  It describes the repayment of a financing arrangement 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 S307 could apply.

Regulation 8 is similar to regulation 5 and deals with the consequences of the release of a liability which would have given rise to a financing expense in circumstances where a party acting at arm’s length might have released the debt.

Regulation 9 refers to the transfer of a financing arrangement to a UK group treasury company (see [###### This guidance applies to worldwide group periods of account ending before or straddling 1 April 2017.

Position where the Excluded Schemes Regulations apply

Condition C within TIOPA10/S307(4) is not met if the scheme is an excluded scheme. Excluded schemes for the purposes of TIOPA10/S307-310, ‘Schemes involving manipulation of the rules in Chapters 3 and 4’, are dealt with in regulations 6 to 11 of SI 2013/2892.

Regulation 7, ‘repayment of a financing arrangement’, is similar to regulation 4 (which deals with the gateway test, see CFM92670).  It describes the repayment of a financing arrangement 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.

Position where the Excluded Schemes Regulations apply

Condition C within TIOPA10/S307(4) is not met if the scheme is an excluded scheme. Excluded schemes for the purposes of TIOPA10/S307-310, ‘Schemes involving manipulation of the rules in Chapters 3 and 4’, are dealt with in regulations 6 to 11 of SI 2013/2892.

Regulation 7, ‘repayment of a financing arrangement’, is similar to regulation 4 (which deals with the gateway test, see CFM92670).  It describes the repayment of a financing arrangement 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 S307 could apply.

Regulation 8 is similar to regulation 5 and deals with the consequences of the release of a liability which would have given rise to a financing expense in circumstances where a party acting at arm’s length might have released the debt.

Regulation 9 refers to the transfer of a financing arrangement to a UK group treasury company (see](https://www.gov.uk/hmrc-internal-manuals/corporate-finance-manual/cfm92520) This would normally involve a novation.

Regulation 10 deals with the case where the original liability is repaid and the UK group treasury company provides a replacement financing arrangement.

Position before the excluded schemes regulations came into effect

Condition C within TIOPA10/S307(4) is not met if the scheme is an excluded scheme.

Examples of the types of schemes that could be excluded from the anti-avoidance rules prior to the effect of SI 2013/2892 (schemes entered into before 4 December 2013) are 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.

 

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.