INTM595110 - Arbitrage: legislation and principles - deductions: disclaiming a deduction

In a case involving the deductions rules, the company may choose to disclaim sufficient of the tax deduction to cancel the additional tax deduction that arises because of the use of the arbitrage scheme, in order to prevent the operation of the statutory rules cancelling tax deductions.

Effect of the legislation

The following rules apply only if all of the entry conditions for the legislation have been met - in particular, only in circumstances where a qualifying scheme has the achievement of a UK tax advantage as a main purpose. Where the legislation would otherwise apply, a company may prevent its further application by making a disclaim of a deduction sufficient to cancel the reduction in UK tax arising from the qualifying scheme.

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Disclaiming a deduction

After a notice has been issued under the deductions rules, s243(4) to s243(6) TIOPA 2010 allow a company to cancel the effect of the scheme in so far as it relates to the scheme’s main purpose of obtaining a UK tax advantage. If a disclaim is made in such amount, then the deductions rules as described in INTM595020 and INTM595030 will apply.

To cancel the tax advantage main purpose, the disclaim should cancel the reduction in UK tax that is attributable to the main purpose of the scheme in achieving a UK tax advantage. This requires the same comparison to be drawn as explained in the second and third paragraphs of INTM595070 , and the disclaimer to be equal to the amount by which the scheme increased UK tax deductions or reduced a UK tax charge. The amount of the disclaim necessary to satisfy the test can be the subject of a clearance application. The disclaim can be made at any time after the notice has been issued until the assessment becomes final.

Where there is a dispute between HM Revenue & Customs and a company concerning the amount that is to be disclaimed, the point may be referred to the First Tier tribunal as a “point of principle” that is relevant to the resolution of an enquiry. HMRC will participate in a joint application once the relevant facts have been obtained.

In other cases it may be that there would have been no deduction absent the arbitrage element created by the hybrid entity or instrument. In these cases a disclaim would need to extend to the full amount of the deduction in order to prevent the operation of the deductions rules.