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HMRC internal manual

International Manual

Arbitrage: legislation and principles - deductions: condition A - what is a scheme?

The deductions rules apply if and only if all of the four conditions A-D set out in s233 TIOPA 2010 are met.

Condition A for deduction cases is specified in s233((2) TIOPA 2010. It says that the transaction to which the company is party forms part of a scheme that is a qualifying scheme.

The term “scheme” is interpreted in s233(3) TIOPA 2010. A scheme could comprise a single transaction, a series of related transactions, or any other arrangement or understanding of any kind, including the establishment of a particular capital structure.

Whether a transaction forms part of a series of transactions or a scheme is in general a question of fact, but this conclusion will follow in any case where one transaction would not have taken place without another transaction, or would have taken place on different terms . However, it is not necessary that transactions must depend on each other in this way in order that they form part of a scheme.

The categories of “qualifying scheme” are set out in s236 to s242 TIOPA 2010, all of which involve the use of either a hybrid entity or a hybrid instrument .The categories are set out in more detail in INTM596000, but in broad outline they describe circumstances in which there is a risk that either:

  • two deductions are given in respect of the same expense; or
  • a deduction is given but there is no corresponding taxable receipt.

In relation to a funding arrangement using a hybrid entity or instrument, the qualifying scheme means the full funding structure including all entities through which funds flow, from initial source to ultimate use within a group of companies.