Debt cap: anti-avoidance rules: main rules: non-abusive schemes: examples
This guidance applies to worldwide group periods of account ending before or straddling 1 April 2017.
The type of arrangements that are unlikely to considered as a scheme to manipulate the rules within Chapters 3 and 4 of Part 7
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. Condition B provides a further filter that removes transactions and arrangements that while conferring a benefit on the group with respect to the debt cap, give no overall tax advantage.
Schemes that would not be filtered out by either conditions B or C may still be filtered out under condition A, when the parties entering into the scheme do not have a main purpose of reducing the relevant net reduction below the amount calculated in accordance with the counterfactual rules.
Schemes that increase the available amount
Any external borrowing by a member of the group will increase the external finance expenses and in turn the available amount. Setting aside a scenario that the external borrowing relates wholly to avoidance (such as a back to back arrangement), 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 be a commercial purpose behind that use. Provided the group is not implementing a scheme that a party has entered into with a main purpose of increasing the available amount, as well as any other commercial (non-tax) purpose, then it should be straightforward to establish the anti-avoidance rules do not apply.
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.
- 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.
- The group may be making an acquisition or borrowing to raise funds to buy back shares in the group. While the external 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.
- A group company may acquire an asset by way of a finance lease. That asset will more likely than not be needed by the business, such as new plant and machinery. Existing assets may be sold and leased back to raise much needed funds used for a commercial purpose. Leasing has been exploited in the past by tax planners, but you should bear in mind that if rules concerning finance leases have been exploited for avoidance purposes, the tax advantage sought may do something other than reducing the relevant net reduction.
- A group may decide to factor trade debt externally to improve cash flow. Straightforward debt factoring arrangements are unlikely to have been entered into to avoid the debt cap rules.
- Existing external borrowings are very unlikely to be schemes that have been entered into by parties with the purpose of manipulating the rules within Chapters 3 and 4 of the debt cap. 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 that decrease the tested expense amount or increase the tested income amount
The calculations of both the tested expense amount and the tested income amount will involve both external and intra-group finance expense and finance income amounts. One calculation considers the relevant group companies that have net financing deductions, the other considers the UK group companies that have net financing income. As discussed above, increasing external debt or entering into new finance leases, etc. is likely to have only a commercial purpose and so condition A, 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 takeover or reorganisation 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 A 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 tested expense amount is reduced. However, it is likely that condition B will not be met as repaying an intra-group loan between two UK group companies will in all likelihood not lead to an overall reduction in corporation tax profits - the reduction in finance expense will be matched by the reduction in finance income.
Outside of this, schemes involving the following sort of intra-group borrowing and lending are unlikely to be caught by the anti-avoidance rules, provided they are not structured with particular transactions that are intended to frustrate the debt cap rules.
- A UK group company borrows from its overseas parent to help fund the acquisition of another UK based group.
- A UK group company makes a loan to an overseas group company to help fund the acquisition of another group.
- A UK group company deposits spare cash with a bank or an overseas group treasury company.