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HMRC internal manual

International Manual

Arbitrage: practical guidance - examples demonstrating the application of the arbitrage legislation: Example 6 - receipts legislation - deferred subscription

Example 6 - receipts legislation - deferred subscription

Use this link to view example 6 - receipts legislation - deferred subscription diagram

Facts: UK Sub 1 is a company established by Code A HoldCo with nominal share capital value equal to the value of UK Sub 2. The Code A and Code B HoldCos agree to swap their holdings in Sub 1 and Sub 2.

The shares are issued to Code A HoldCo on deferred payment terms that allow the subscriber to make payments in instalments. The amount payable is increased to reflect the delay in payment and in accordance with Code A rules, the Code A HoldCo is given a tax deduction for the increase. After the share swap, Code A HoldCo retains its obligation to make the deferred payments for the shares now held by Code B HoldCo.

The end result is economically the same as if Code A HoldCo had been indebted to UK Sub 1 in respect of unpaid share capital. If this had been the arrangement, the additional amounts paid by the HoldCo would have been interest paid on the debt, taxable in the hands of UK Sub 1.

Under the scheme as described, the financial avoidance rules do not apply to UK Sub 1 because of the Code B HoldCo positioned between the UK HoldCo and UK Sub 1.

Analysis: This example considers the effect of the arbitrage receipts legislation.

Condition A is met in relation to UK Sub 1 and the Code A HoldCo.

Condition B is met because the payment for shares is a contribution to UK Sub 1’s capital.

Code A HoldCo is allowed a tax deduction under Code A tax rules for the extra amount it pays in compensation for the deferred subscription terms. Therefore Condition C is met.

Because FA96/S91A does not apply in this case, Condition D is met.

Since it was anticipated that UK Sub 1 would not otherwise be taxed on any part of the amount received in respect of shares, Condition E is also met. The receipts legislation therefore applies.

The rule for receipts taxes the amount received by UK Sub 1 to the extent that Conditions C and D are satisfied in relation to the payment. The whole of the payment satisfies Condition D, since none of it is taxed in the UK, but only the part of the payment that is given as a tax deduction to Code A HoldCo satisfies Condition C.

Therefore UK Sub 1 is taxed on the amount that is given as a tax deduction to Code A HoldCo. This is the part of the payment that compensates UK Sub 1 for the fact that it received its money later than it would have done under immediate payment terms for its shares.