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HMRC internal manual

International Manual

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Arbitrage: legislation and principles - deductions: Expenses deducted more than once

This situation most commonly arises with hybrid entities. For the definition of a hybrid entity, see INTM596010 and the legislation at s233 et seq TIOPA 2010.

Section 244 TIOPA 2010 denies a corporation tax deduction in respect of an expense if the same expense (“the expense in question”) also gives rise to another tax deduction. In this context, “tax” means a tax on profits or gains. It therefore includes corporation tax, income tax and similar taxes in non-UK territories. It does not include indirect taxes. The rule will only apply if all of the conditions in s233 TIOPA 2010 have been met (see INTM595040).

The phrase “expense in question” does not extend to cover separate legal arrangements with a shared objective. For example, rental payments under a sub-lease are not the same expense as payments under a head lease, even though the asset subject to the lease may be the same in both cases or sequential leasing is part of an overall provision of an asset.

In determining whether more than one deduction arises in respect of the expense, deductions claimed by or given to any person under any tax code will be considered. If another rule elsewhere having a similar effect would also act to deny a deduction, the legislation will still apply to the deduction in the UK. In short, both deductions will be denied. It will not be open to a company to choose where a deduction for this expense will be taken.

Simple example of scheme involving a hybrid entity, resulting in a “double dip” or two deductions for the same item of expense

Use this link to view example diagram

The UK sees the overseas partnership as transparent. Accordingly, the corporate partners (UK Sub 1 and UK Sub 2) are able to claim interest deductions in the UK for the payment of interest made by the overseas partnership.