CFM39540 - Loan relationships: tax avoidance: regime anti-avoidance rule: excluded arrangements

CTA09/S455C(4) and S698C(4)

A loan-related or derivative-related tax advantage is defined in terms of the amount or timing of the credits and debits to be brought into account under Part 5 or Part 7. Particular rules within Part 5 or Part 7 may affect the amount or timing of credits and debits in a way that falls within the definition of a loan–related or derivative-related tax advantage. It is clearly not intended that the anti-avoidance rules should be applied where such effects are those intended by the tax rules which give rise to them. Sometimes, arrangements may be put in place to take advantage of a provision which provides, for example, an exemption or relief which, in the terms of S455C(5) is a loan-related tax advantage. S455C(4) and S698C(4) put beyond possible doubt that where such arrangements are made in circumstances in which, it is reasonable to regard that the provision in question was intended to apply, the arrangements are not relevant avoidance arrangements. The regime anti-avoidance rules will therefore not operate in such circumstances.

By way of example, a company in financial difficulty and seeking to reorganise its finances might enter into a genuine debt for equity swap agreement with a creditor with the intention of obtaining tax exemption for the release under CTA09/S322(4). The exemption from bringing a credit into account would amount to a loan-related tax advantage under S455C(5), and the arrangements may have a main purpose of obtaining that advantage. Because the advantage arises in circumstances where the S322(4) exemption was intended to apply, the arrangements would not be regarded as relevant avoidance arrangements. If, however, a company sought artificially to bring itself within the legislative exemption purely for tax purposes, for example by issuing shares with no economic or commercial purpose, then the arrangement could well amount to a relevant avoidance arrangement.

Equally, simply making an election, as provided for in legislation (for example, under the Disregard Regulations or a designated currency election), that affects the amount or timing of credits or debits, will not amount to a relevant avoidance arrangement if it is being used in the way envisaged by the statute. If, however, an election is used as part of a wider scheme to exploit the statutory provisions (for example, in conjunction with changes in accounting dates) that could well constitute a relevant avoidance arrangement.

The exclusions in S455C(4) and S698C(4) require that any tax advantage should be reasonably regarded as consistent with any principles or policy objectives underlying a provision of Part 5 or Part 7. Whether or not this requirement is met will often be uncontentious, but sometimes differing interpretations may be possible. In cases of dispute, the onus is with the company to demonstrate that the exclusion applies.

In some cases it may be difficult to determine any principles or policy objectives underlying the relevant provisions. However, the legislation does not require principles or policy objectives to be explicitly stated; it is sufficient that they should be implied. Nor is it necessary definitively to establish the outcome of arrangements as consistent with any principles or objectives; the test is whether it is reasonable to regard it as consistent. In broad terms, the question to be considered is whether the outcome can be seen as one that Parliament intended when it enacted the relevant provisions.

S455D and S698D give some examples of outcomes which may typically, but not necessarily, indicate that the obtaining of a tax advantage would not be seen as consistent with principles or policy objectives.