This part of GOV.UK is being rebuilt – find out what beta means

HMRC internal manual

International Manual

Arbitrage: legislation and principles - Introduction: Types of arbitrage countered by the 2005 legislation

Types of tax arbitrage countered by the 2005 legislation

Legislation was introduced in March 2005 to counter contrived arrangements intended to avoid UK tax. This legislation applies to schemes involving both deductions and receipts.

The deductions rules apply only where a scheme involving a hybrid entity or hybrid instrument increases a UK tax deduction or deductions to more than they would otherwise have been in the absence of the scheme. The legislation does not apply in a case where, although there is such a scheme, it has no effect on UK taxation. Where the legislation does apply, the effect will be to limit tax deductions as far as is necessary to cancel the increase in UK tax deductions attributable to the scheme. The deductions rules are designed to disallow UK tax deductions which are

  1. not matched by a taxable receipt or
  2. where there is another deduction allowed for the same item of expenditure.

The receipts rules apply in relatively narrow circumstances where an amount that represents a contribution to capital is received by a UK resident company in a non-taxable form while it creates a tax deduction for the payer.