CFM77810 - Other tax rules on corporate debt: tax mismatch schemes: Tax capacity
The tax capacity assumption at CTA10/S938T 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 the company which is a party at any time to the scheme obtains 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 company is less than it would have been in the absence of the scheme, there is an economic profit.
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.