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HMRC internal manual

International Manual

Arbitrage: legislation and principles - deductions: four conditions to be met for the arbitrage rules to apply

The deductions rules apply if and only if all of the following four conditions set out in s233 TIOPA 2010 are met:

  • Condition A - the transaction giving rise to the deduction is part of a scheme involving the use of a hybrid entity or hybrid instrument, and;
  • Condition B - the scheme has certain specified characteristics (a “qualifying scheme”) that allow the hybrid entity or hybrid instrument to create either a double deduction or a deduction not matched by a taxable receipt, and;
  • Condition C - the main purpose or one of the main purposes of the scheme is to obtain a UK tax advantage, and;
  • Condition D - the UK tax advantage so obtained is more than a minimal amount.

If the Commissioners of HM Revenue and Customs consider the above conditions are met they will issue a notice giving effect to the legislation. The company must then take account of the legislation in its self assessment, which should reflect its own view of whether the legislation applies, and if so what effect it has. The legislation allows a voluntary disclaim of a tax deduction to be made to cancel the effect of a scheme, and thereby prevent any further effect of the legislation.