Introduction Details of the Schedule Part 6 – Anti-avoidance
96.Part 6 contains three sets of ant-avoidance rules targeted at schemes designed to circumvent provisions in the Schedule. The first rule is targeted at avoidance schemes that manipulate the rules in Part 2 of Schedule 15 in order to avoid the application of the Schedule to a group of companies that would not otherwise have met the ‘gateway’ conditions in paragraph 2. The second targets schemes to reduce the amount of a disallowance under the debt cap, whether by decreasing the tested expense amount or by increasing the available amount or the tested income amount, or any combination of these. The third rule counters manipulation of the Part 5 rules which disregard certain intra-group financing income.
97.Paragraph 47 counters schemes that attempt to manipulate the ‘gateway’ and ‘financial services exclusion’ rules. For example, a group that would otherwise fail the test in paragraph 2 (so that the debt cap rules applied) might borrow from a bank at the end of its period of account to boost the ‘worldwide gross debt’ amount defined at paragraph 3, repaying the loan the next day. A period of account of the worldwide group falls within paragraph 47 if three conditions are met.
98.Sub-paragraph (1) provides that, where the conditions are met, the ‘gateway’ result is ignored and the full rules of Schedule 15 apply to that period of account. This may (or may not) lead to a disallowance of financing costs of UK companies.
99.The first condition, at sub-paragraph (2), is met if a scheme has been entered into at any time before the end of the period, and the period would have been within paragraph 2(1) if the scheme had not been entered into. It is therefore capable of applying to schemes that have been entered into before the start of the period of account, as well as those put in place during the period. ‘Scheme’ is defined in wide terms at paragraph 53(1) and may involve a single transaction, or more than one.
100.Sub-paragraph (3) gives the second condition. It must be the main purpose, or one of the main purposes, of any party to the scheme to ensure that a group passes the gateway test. The party must have that purpose when it enters into the scheme. So, in the example above of a group company undertaking overnight borrowing at the end of the group’s period of account, it would be necessary to examine that company’s purpose when it borrowed. If the borrowing was for a genuine commercial purpose, and any consideration of its effect on the ‘gateway’ condition was no more than incidental, paragraph 47 would not apply.
101.The third condition, in sub-paragraph (4), is that the scheme is not an excluded scheme. ‘Excluded scheme’ is defined in paragraph 53(2) as one answering to a description specified in regulations made by the HMRC Commissioners (under negative procedure). This power to exclude particular schemes or arrangements applies to all three rules in Part 6, and provides a safeguard against the possibility that some normal tax planning arrangements, which would not be seen as abusive, might nevertheless be caught by the anti-avoidance rule.
102.Paragraph 48 is directed at schemes manipulating the tested expense amount, the tested income amount or the available amount, or any combination of these three. It looks at the aggregate effect of these three amounts – the ‘relevant net deduction’ - defined in paragraph 49. This is so much of the total disallowed amount (the tested expense amount less the available amount) as cannot be covered by a disregard of financing income of UK group companies. The relevant net deduction may be nil.
103.Sub-paragraph (1) provides that this rule applies where three conditions are met. Both the application of the rule, and the conditions, require a comparison to be made between the effect of the actual scheme, and the effect of an alternative scenario, based on assumptions set out in paragraph 50. Where the conditions are met, the tested expense amount, the tested income amount and the available amount must all be calculated on the basis of the alternative scenario. It is these amounts that group companies must take account of for the purposes of Part 3 or Part 4 of the Schedule.
104.Paragraph 50 provides that assumptions must be made in calculating amounts or sums in accordance with this paragraph, and sets out those assumptions. The first is that the scheme in question had not been entered into. The second is that, if the effect of the debt cap had not been a factor, anything which is more likely than not to have been done or not done would have been done or not done, as the case may be. For example, if there were three courses which the group might have followed with 60%, 35% and 5% probability respectively, only the one which the group had a 60% chance of following would be ‘more likely than not’.
105.Paragraph 48(2) sets out the first condition. It must be the main purpose, or one of the main purposes, of any party to a scheme, on entering into it, to reduce the amount of the relevant net deduction, compared with what it would have been under the alternative scenario based on the assumptions in paragraph 50.
106.A UK member of the group, which had an outstanding loan from its overseas parent, might for example seek to reduce its financing expense amount by paying a lump sum to a bank in return for the bank taking on the obligation to pay interest. Had the debt cap not been a consideration, it would have carried on paying the interest to its parent in the normal way. Since the debits representing the amortisation of the lump sum arise from a related transaction (see paragraph 54(3)(c) of the Schedule), that company’s financing expense amount is less than it would have been under the alternative scenario. This in turn means that the tested expense amount, and hence the ‘net relevant deduction’ are reduced. Provided that it is a main purpose of the UK company (or any other party to the scheme) to achieve this result, the paragraph 48(2) condition will be satisfied.
107.The further condition in paragraph 48(3) means that this anti-avoidance rule will bite only if the scheme also reduces the overall corporation tax profits (or increases the losses) of UK group companies, compared to the alternative scenario. In the example above, the debits from amortisation of the lump sum remain allowable loan relationships debits; the group may incur additional fees and hedging costs; and (absent the anti-avoidance rule) the debt cap restriction on relevant group companies would be reduced. All of this means that the effect of the scheme would almost certainly be a reduction in corporation tax profits.
108.This is not necessarily so, however. For example, the financing expenses of the company would similarly be reduced if the parent company were to replace the loan by equity. Such an arrangement might be a direct response to the introduction of the debt cap, so the group could not argue that reduction or elimination of a debt cap disallowance was not a main purpose. But such action would also increase (or, at any rate, not decrease) the corporation tax profits of the UK group. It would not be caught by the anti-avoidance rule.
109.The words ‘profits …chargeable to corporation tax’ in paragraph 48(3)(a) take their normal meaning. It is the totality of profits on which corporation tax is paid, after reduction by losses or reliefs brought forward, or group relief surrendered either by another UK company or a subsidiary in the European Economic Area. The alternative test, in paragraph 48(3)(b), is whether the losses of UK group companies, that are capable of being a carried-back or carried-forward amount, are increased. Paragraph 51 gives an exhaustive listing of ‘carried-back amounts’ or ‘carried-forward amounts’. The latter includes capital losses.
110.A loss that has been offset against profits of the period, either in the same company or in another group company, is excluded from being a carried-back or carried-forward amount. For example, suppose that the sole effect of a scheme is to increase the corporation tax profits of UK group company X by £1 million, but also to increase the losses of company Y by £1 million. Y surrenders £1 million to X as group relief. Y’s loss is therefore taken into account under paragraph 48(3)(a), and cannot be counted again under paragraph (b). This means that neither leg of paragraph 48(3) is satisfied: the aggregate corporation tax profits of the group are not decreased, nor is there an increase in the losses capable of being carried forward or back. Even if the remaining paragraph 48 conditions are satisfied, the scheme will not be within the anti-avoidance rule. If, however, Y chooses not to surrender its loss, but instead carries it forward (or back), the condition at paragraph 48(3)(b) will be met, and the anti-avoidance rule is not prevented from applying.
111.Where the accounting period of a UK group company does not coincide with the period of account of the worldwide group, paragraph 48(5) provides for time-apportionment of those profits or losses of accounting periods which fall wholly or partly within the relevant period of account.
112.The rule that losses taken into account in determining corporation tax profits cannot also contribute to carried-back or carried-forward amounts also applies to such time-apportionments. Suppose, for example, the worldwide group has a 12-month period of account ending on 31 December. A UK member of the group prepares accounts to 31 March, so that two of its accounting periods fall partly within the relevant period. This UK company has trading losses arising in the first period, which are carried forward and relieved in the second. In applying paragraph 48(5), losses that are taken into account under paragraph 48(3)(a) because they have reduced the corporation tax profits of the second period are not also treated as ‘carried-forward amounts’ of the first period.
113.Paragraph 48(4) provides that any ‘excluded scheme’ is not caught by this anti-avoidance rule.
114.Paragraph 52 deals with schemes that manipulate the rules in Part 5 of the Schedule. Under paragraph 40, financing income received by a UK company is disregarded for corporation tax purposes where three conditions are met. Sub-paragraph (2) requires that the scheme has the effect of securing that any of these three paragraph 40 conditions are met in relation to a particular financing income amount.
115.As with the previous two anti-avoidance rules, it must be the main purpose or one of the main purposes of any party to the scheme on entering into to it to achieve this effect (sub-paragraph (3)) and the scheme must not be an excluded one (sub-paragraph (4)).
116.Sub-paragraph (5) sets out the consequence of meeting these conditions – the “manipulated” condition of paragraph 40 is treated as if had not been met, and so the financing income amount is not disregarded.