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HMRC internal manual

Corporate Finance Manual

Debt cap: interaction with other rules: arbitrage

TIOPA10/S232 to S259The debt cap rules in TIOPA10/PT7 will 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 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. The legislation will deny relief for deductions forming part of an arbitrage scheme, and certain receipts become taxable. Further guidance on the application of the legislation can be found at

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 Schedule 15, be brought into account for corporation tax purposes.

If relief for a deduction is denied under the 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 a receipt 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).