CTM07520 - Corporation Tax: tax avoidance involving carried-forward losses: conditions for the rule to apply

CTA10/s730G

There are five conditions, all of which must be met for the rule to apply.

Condition A – profits from the tax arrangements

As a consequence of ‘the tax arrangements’, profits arise to a company against which the company could set one of the carried-forward reliefs. See CTM07525 on the scope of the tax arrangements.

This means that the company must have one or more of the carried-forward reliefs set out at CTM07515 and the tax arrangements must give rise to a sufficient increase in the company’s income to generate a profit in that company of a kind that the company could use one or more of its carried-forward reliefs against.

If the profit would have arisen to the company even absent the tax arrangement then the rule will not apply. If the profits would have arisen to another company in the group, but arise to the company in question as part of the tax arrangements, this condition will be met.

‘Arrangements’ is defined by s730H, and includes any agreement, understanding, scheme, transaction or series of transactions (whether or not legally enforceable).

Condition B – deductions from the tax arrangements

As a consequence of the arrangements new deductions arise to the company or a connected company in that accounting period. See CTM07530 for the deductions that are included.

It must also be reasonable to assume that neither the company nor any company connected with it would have brought that amount into account as a deduction but for the tax arrangements.

A deduction may arise in the form of a relief from profits, a reduction in profits, or an increased loss.

Connected takes its meaning from CTA10/s1122, so is wider than a group relief relationship.

It may be the case that the deduction would arise anyway, but the condition will be met where it arises to a particular company, and in that accounting period, as a consequence of the arrangements.

Condition C –main purpose test

The main purpose, or one of the main purposes, of the arrangements is to secure a corporation tax, or (for accounting periods beginning on or after 8 July 2015), a CFC charge advantage involving:

  • The additional profits,
  • The use of carried-forward relief against those profits, and
  • The new deduction.

The legislation does not define what is meant by ‘main purpose’ or ‘one of the main purposes’. These expressions are to be given their normal meaning. They have to be applied objectively, having regard to the full context and facts.

It will often be clear whether trying to obtain a corporation tax or CFC charge advantage is ‘the main purpose’ of a particular arrangement. Such would be the case, for example, where the arrangement would not have been carried out at all were it not for the opportunity to obtain the advantage. But it is possible for there to be a main tax purpose if an arrangement, that would otherwise have occurred, has been reshaped or has been entered into on different terms and conditions than it would have been had tax not been a consideration.

It may be the case that there is more than one purpose to the tax arrangements. It will be necessary to take into account all the circumstances, including comparison of any corporation tax or CFC charge advantage purpose with the other purposes of the transaction, to determine whether the corporation tax or CFC charge advantage is ‘one of the main purposes’.

The corporation tax or CFC charge advantage is assessed by reference to the position of the company itself, or, if there are connected companies involved in the tax arrangement, by reference to the position of the companies taken together. Hence the corporation tax or CFC charge advantage may be the net tax position of the connected companies as a consequence of the arrangements.

Corporation tax advantage is defined in CTA10/s730H, and includes:

  • A relief from corporation tax or increased relief from corporation tax;
  • A repayment of corporation tax or increased repayment of corporation tax;
  • The avoidance or reduction of a charge to corporation tax or an assessment to corporation tax;
  • The avoidance of a possible assessment to corporation tax; or
  • The deferral of a payment of corporation tax.

CFC charge advantage is also defined in CTA10/s730H, as the avoidance or reduction of a charge or assessment to a charge under Part 9A of TIOPA 2010 (controlled foreign companies).

Note that the CFC charge advantage was inserted into Condition C by F(No 2)A 2015/s37 and has effect for the purposes of calculating the taxable total profits of companies for the accounting periods beginning on or after 8 July 2015, or for notional periods starting on that date where the company’s accounting period straddles it.

Condition D –comparison of anticipated tax value and non-tax value

When the tax arrangements were entered into the anticipated tax value of them was more than the anticipated non-tax value. Guidance on the meaning of tax value and non-tax value is at CTM07535. The assessment of these values is done at the level of the company or the company taken with any other companies party to the tax arrangements.

So even where one of the main purposes of the tax arrangements was to obtain a tax advantage, if the anticipated non-tax value of the arrangements was the greater part of the overall value anticipated from the arrangements then the rule will not apply.

Condition E –precedence given to bank loss restriction anti-avoidance rule

These rules will not apply where the targeted anti-avoidance rule in CTA10/s269CK applies.

Condition E will only be relevant in the case of ‘banking companies’, as defined in Part 7A (broadly: banks and building societies), and only then in the case of losses carried forward from prior to 1 April 2015.