CFM39520 - Loan relationships: tax avoidance: regime anti-avoidance rule: relevant avoidance arrangements

CTA09/S455C(3) and S698C(3)

Meaning of ‘relevant avoidance arrangements’

Arrangements are relevant avoidance arrangements if their main purpose, or one of their main purposes, is to enable a company to obtain a {loan-related or derivative-related tax advantage}. The questions of what the purposes of particular arrangements might be, and whether they amount to main purposes are questions of fact, to be determined in the light of the evidence available. As Lord Upjohn said in IRC v Brebner [1967] 43TC705:

“The question whether in fact one of the main objects was to avoid tax is one for the Special Commissioners to decide on a consideration of all the relevant evidence before them and the proper inferences to be drawn from that evidence.”

The legislation does not refer to the purposes of any of the participants in, or parties to, the arrangements, but to the purposes at which the arrangements were aimed. In practice, determining the purpose of the arrangements is likely in part at least to require examination of the purpose of parties in entering into them. But it is not necessary to establish a tax avoidance purpose on the part of any particular participant. It should be borne in mind that parties may have different purposes in entering into arrangements, particularly where the parties are unconnected, and that one party may not be aware of the purposes of another. If any of the parties entered into the arrangements for tax avoidance purposes, then it is likely that seeking a tax advantage will have been at least one of the purposes of the arrangements.

The legislation does not define what is meant by a ‘main purpose’. Where the only purpose of the arrangements is to obtain a tax advantage - that is, they would not have been put in place otherwise - or where any commercial purpose is not substantial, then it will be the main purpose, and will normally be straightforward to discern.

Where the arrangements have more than one purpose, establishing a tax advantage as ‘one of their main purposes’ may be more difficult. The question in such a case may be, for example, has an otherwise commercial transaction been reshaped or undertaken on such terms with a substantial objective of achieving a different tax outcome? All the purposes have to be considered in the round, and a view taken as to whether obtaining a tax advantage amounted to a main purpose. Because it is possible for arrangements to have more than one main purpose, a main purpose is not necessarily the most important or dominant purpose.

Even where arrangements are deliberately set up in a way that results in a tax advantage, there will not be a main purpose of obtaining a tax advantage if, on the facts of the case, the obtaining of the tax benefit was merely incidental or ancillary to a bona fide commercial purpose. However, it is likely that any tax advantage which amounts to more than an incidental benefit will, prima facie, indicate a main purpose of obtaining it.

In the High Court decision in Sema Group Pension Scheme v IRC [2002] BTC 109, upheld in the Court of Appeal at [2003] BTC 106, Lightman J made clear that a reduction in tax payable is not necessarily a main purpose of a transaction merely because it is a relevant feature in the decision to proceed with it:

‘‘The tax advantage may not be a relevant factor in the decision to purchase or sell or in the decision to purchase or sell at a particular price. Obviously if the tax advantage is mere ‘‘icing on the cake’’ it will not constitute a main object. Nor will it necessarily do so merely because it is a feature of the transaction or a relevant factor in the decision to buy or sell. The statutory criterion is that the tax advantage shall be more than relevant or indeed an object; it must be a main object. The question whether it is so is a question of fact for the Commissioners in every case.’

In assessing the purpose of arrangements, it may be necessary to consider the extent of the arrangements to be taken into account – that is, which transactions, agreements etc. are to be regarded as part of the arrangements in question. This may arise in particular where additional steps or features, aimed at obtaining a loan-related or derivative-related tax advantage, are inserted into or otherwise combined with commercial transactions. Individual transactions should not be considered purely in isolation; it is necessary to take an overall view of all the relevant circumstances. Lord Pearce said in IRC v Brebner [1967] 43TC705:

“The commissioners rightly approached the transaction as a whole from a broad commonsense view…It was argued that their approach should have been more analytical; that they should have isolated the later part of the transaction from the earlier; and that the actual resolutions which finally obtained the tax advantage must have had as their main object the tax advantage, since it was to that alone that they (in isolation) were referable…In my opinion however, such analysis and isolation would be wrong and would destroy the opportunity of arriving at a just and sensible conclusion…”

However, the fact that the tax-related elements of the arrangements existed in the context of a commercial transaction does not preclude a main purpose of obtaining a tax advantage. It may be suggested that, because the tax-related elements of the arrangements were in some sense subsidiary to a commercial transaction, there was not a main purpose of obtaining the tax advantage. This does not necessarily follow. The facts that, for example, steps inserted to obtain a tax advantage may have been few in number, or that the amount of the tax advantage would have been smaller than any commercial benefit or that the commercial transaction concerned was in some way particularly important to the company, do not determine the question of whether there was a main purpose of obtaining a tax advantage. It is more relevant to ask whether the arrangements were aimed squarely at the tax advantage as well as the commercial benefits, or whether the tax advantage was merely an incidental effect of the commercial transaction.

Taking tax advice in respect of a commercial transaction is common and is not by itself evidence of a main tax purpose. Commercial transactions may be structured in different ways, and the tax effects may be a factor in a company’s selecting a particular alternative. A simple example would be a decision to raise capital to meet a commercial need by way of plain vanilla debt rather than equity. In this case, the raising of capital for commercial purposes would be a main purpose of the arrangements; if no other facts were relevant, the Part 5 debits in respect of the interest payable would be incidental to that commercial purpose.

This principle has been recognised by the courts; in IRC v Brebner [1967] 43 TC705, Lord Upjohn said:

“When the question of carrying out a genuine commercial transaction, as this was, is considered, the fact that there are two ways of carrying it out - one paying the maximum amount of tax, the other paying no or much less tax - it would be quite wrong as a necessary consequence to draw the inference that in adopting the latter course one of the main objects is, for the purposes of the section, the avoidance of tax. No commercial man in his senses is going to carry out commercial transactions except upon the footing of paying the smallest amount of tax involved.”

Meaning of ‘arrangements’

‘Arrangements’ includes any agreement, understanding, scheme, transaction or series of transactions, whether or not legally enforceable (see CTA09/S455C(2) and S698C(2)).