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HMRC internal manual

International Manual

Distribution exemption: Anti-avoidance legislation: payments not at arm's length

CTA09/S931P: Schemes involving payments not on arm’s length terms

CTA09/S931P is an anti-avoidance rule that applies to a distribution where taxable profits are reduced (or losses increased) as part of a tax advantage scheme (INTM651040), and an additional condition is met.

The additional condition is in two parts. First, as part of the scheme, and in respect of goods or services, a relevant person must make a payment or receive something, or give up a right to income. Secondly, the amount of the payment or receipt, or amount of income given up must differ from the amount which the relevant person would have paid, received or given up in respect of the goods or services if the distribution had not been made.

In each case it is necessary to compare what actually happened with what it is reasonable to suppose would have happened in the absence of the distribution.

The section cannot apply solely because expenses such as interest payments are incurred in order to fund an equity investment. S931P will not apply unless it is reasonable to suppose that the amount of interest (or other expense) differs from the amount that would have been paid in the absence of the distribution.

S931P cannot apply in any case where transfer pricing legislation (TIOPA10/Part 4) cancels the tax advantage arising from a non-arm’s length transaction.

Where it applies S931P prevents a distribution from falling into any exempt class and so it becomes taxable income.