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HMRC internal manual

Corporate Finance Manual

Debt cap: anti-avoidance rules: main rules: particular avoidance: examples

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

The type of schemes that will be caught by the anti-avoidance rules dealing with the main rules of TIOPA10/PT7

TIOPA10/S307 to S310 contain the anti-avoidance rules that are intended to prevent manipulation of the rules within Chapters 3 and 4. In direct terms this means the anti-avoidance rules are intended to prevent manipulation of the calculation of

  • the available amount;
  • the tested expense amount; and
  • the tested income amount.

However sections 307 to 310 also deal with schemes that indirectly lead to manipulation of these amounts, such as a scheme that looks to manipulate the make-up of a group.

The types of scheme that are likely to be caught by the anti-avoidance rules are:

  • Schemes involving a temporary restructuring of the group in order to put a cash-rich company into the UK, and hence to create net financing income and increase the tested income amount..
  • 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. The available amount is increased by the finance expense payable on the additional $200 million debt.
  • Schemes involving back to back arrangements. For example one overseas group company borrows €1 billion, invests the money in another overseas group company which places the money on deposit with the same bank. The difference between the rate for borrowing and the deposit rate is 25 basis points, which represents the bank’s fee for providing the back to back arrangement. The scheme increases the available amount for a period of account of the worldwide group by the amount of interest payable on €1 billion borrowing.
  • 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.