ANNEX 1:: MINOR CHANGES IN THE LAW Change 9: Avoidance: tax arbitrage: cases where payee not treated as not liable as a result of scheme: section 245
This change clarifies the exception (in section 25(8) of F(No 2)A 2005) to one of the conditions which may cause the tax arbitrage legislation to apply.
Chapter 4 of Part 2 of F(No 2)A 2005 addresses avoidance involving tax arbitrage. If the statutory conditions are met in a deduction case, the company in question must calculate (or recalculate) its income and chargeable gains for the purposes of corporation tax, or its liability to corporation tax, in accordance with rule A in section 25(3) of that Act and rule B in section 25(6) of that Act. Under section 25(6)(c) of that Act, one of the conditions for rule B to apply is that:
“in respect of the payment or payments that the payee receives or is entitled to receive as a result of the transaction or series of transactions [mentioned in section 25(6)(a) of that Act], or part of such payment or payments, the payee is not liable to tax or, if liable, his liability to tax is reduced as a result of provision made or imposed by the scheme [mentioned in section 25(6)(a) of that Act].”
Section 25(8) of F(No 2)A 2005 makes an exception to section 25(6)(c) of that Act. It provides:
“The requirement in subsection (6)(c) is not satisfied if the payee is not liable to tax because he is not liable to tax on any income or gains received by him or for his benefit under the tax law of any territory.”
It is arguable that section 25(8) of F(No 2)A 2005 leaves it open for section 25(6)(c) of that Act to be satisfied if:
	the payee is in principle liable to tax in respect of the payment or payments; but
	this liability is extinguished by some form of tax relief which is not connected with the scheme.
But in practice HMRC do not interpret section 25(8) of F(No 2)A 2005 so narrowly.
In section 25(6)(c) of F(No 2)A 2005, it is not clear how far the phrase “as a result of provision made or imposed by the scheme” applies to “the payee is not liable to tax” as well as to “his liability to tax is reduced”. Section 245(4) clarifies this by moving the phrase under review forward before the paragraphing and thus excluding the narrow interpretation.
This change is in taxpayers’ favour in principle. But it is expected to have no practical effect as it is in line with generally accepted practice.