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HMRC internal manual

International Manual

Arbitrage: legislation and principles - deductions: interaction with other legislation

Interaction with other legislation

The guidance on arbitrage: legislation and principles is specific to the question of when it may be inferred that a tax arbitrage scheme has a main purpose of achieving a UK tax advantage. It does not have any wider application.

There may be instances where there is some overlap with other legislation in respect of loan relationships, CTA09/S441-S442 (previously FA96/SCH9/PARA13) transfer pricing and thin capitalisation. However, the arbitrage legislation is distinct and its application is not dependant upon these other provisions. Equally, where other provisions contain a purpose test, the application of the anti-arbitrage legislation is not necessarily affected by the outcome of that test.

In particular, transfer pricing and thin capitalisation rules apply according to entirely different criteria than are relevant to the arbitrage legislation. However, some taxpayers may wish to seek clearance on thin capitalisation or Controlled Foreign Companies issues at the same time as an arbitrage clearance, in which case HM Revenue and Customs will try to accommodate their wishes.

Revenue & Customs Brief 01/09 explains how an application for an Advance Thin Capitalisation Agreement (ATCA) might interact with taxpayer concerns about the application of the arbitrage rules. It states that the 2005 anti-arbitrage legislation falls outside the ATCA regime and outside the governance processes of the Transfer Pricing Group. The anti-arbitrage legislation is subject to its own informal clearance process controlled by the arbitrage specialists within Business, Assets & International. However, where a company has made an arbitrage clearance application alongside an ATCA application, so that the company is asking for a set of transactions to be reviewed from both perspectives, HMRC will endeavour to deal with them in as coordinated a way as it can.

The worldwide debt cap (FA09/SCH15/PARA54) rules will apply to financing expense and income amounts after any adjustments to deductions or receipts made under the arbitrage rules.

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 FA09/SCH15/PARA54. If a receipt becomes taxable under the arbitrage rules, it will have been brought into account for corporation tax purposes and will be financing income amounts if it meets any of conditions A to C set out in FA09/SCH15/PARA54 (2) to (5).