CFM77620 - Other tax rules on corporate debt: group mismatch schemes: tax capacity
The tax capacity assumption at CTA10/S938G is used to determine whether or not a scheme will, or might, secure a relevant tax advantage. The economic profits or losses of the scheme must be calculated as if all companies party at any time to the scheme obtain the full tax benefit of any scheme loss (and is fully charged to tax on any scheme profits).
If, on this assumption, the overall corporation tax charged on the group is less than it would have been in the absence of the scheme there is an economic profit. This calculation involves all the companies that are party to the scheme.
This ensures that the tax advantage must arise as a result of structurally asymmetrical tax treatment of the transactions and not because of circumstantial matters such as losses that might be available to shelter profits from the loan or derivative.
It is also worth noting that for the purposes of calculating whether or not there has been a relevant tax advantage Part 4 TIOPA (transfer pricing) should not be applied to calculate what would have applied if the arm’s length provision had been made instead. The calculation is to be completed on the facts and with the figures as they stand in the actual scheme.