CFM93040 - Debt cap: interaction with other rules: tax arbitrage

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

TIOPA10/S232 to S259 {#}

Note also that the “Tax Arbitrage” provisions in TIOPA10/PT6 ceased to apply with effect for company accounting periods beginning on or after 1 January 2017, at which point they were superseded by the “Hybrid and other Mismatches” provisions of TIOPA10/PT6A.

The debt cap rules in TIOPA10/PT7 apply to financing expense and income amounts after any adjustments to deductions or receipts made under the arbitrage rules contained in TIOPA10/S232 to S259.

The tax arbitrage rules apply to companies that use schemes involving certain types of hybrid entities or hybrid instruments for tax avoidance purposes, but only if HMRC issues a notice directing that the legislation applies. If a notice is issued, a company must make or amend its self-assessment taking into account the legislation. Where payments arise or receipts do not arise under a scheme that falls within certain specified descriptions set out in TIOPA10/PT6, the legislation may have the effect of denying a deduction for an expense that would otherwise have been a financing expense amount of a company, or of bringing into account for taxation amounts that would be financing income amounts. Further guidance on the application of the legislation can be found at: http://www.hmrc.gov.uk/manuals/intmanual/INTM590000.htm.

The financing expense amounts and financing income amounts of UK group members that are compared under the debt cap rules with the gross finance expenses of the group as a whole are those deductions and receipts that would, apart from TIOPA10/PT7, be brought into account for Corporation Tax purposes.

If relief for a deduction for an amount is denied under the tax arbitrage rules, the amount will not have been brought into account for corporation tax purposes and will not therefore be a financing expense amount under TIOPA10/S313. If an amount becomes taxable under the arbitrage rules, it will have been brought into account for Corporation Tax purposes and will be a financing income amount if it meets any of conditions A to C set out in TIOPA10/S313 (2) to (5).