CFM92645 - Debt cap: anti-avoidance rules: general: change in purpose and whether there is a new scheme to consider

This guidance applies to worldwide group periods of account ending before or straddling 1 April 2017.

A change to the structure of a scheme, or its participants, is likely to mean it is a new scheme

If the structure of the identified scheme changes then there may be a new scheme, in which case the purpose of the parties involved in that scheme may have to be reconsidered. If a party enters a scheme and that scheme changes, but the party is still involved in the same transactions that party can still be considered to have entered a new scheme even though it is still involved in the same transactions.

For example, suppose that company A has lent £100 million to its subsidiary B, which has on-lent £100 million to a fellow subsidiary C. The loans from A to B, and from B to C, are part of the same scheme. A then converts its £100 million debt investment in B into equity. This transaction is not part of the original scheme. On the facts, the conversion of debt into equity is part of a new scheme, to which the loan between B and C is integral. C will be a party to the new scheme.

Alternatively the structure may remain largely intact, but the participants in the scheme change. This would constitute a new scheme which means the purposes of all the parties have to be considered.

The fact that there are changes means there is a new scheme and one must consider if one of the parties enters into the reconstructed scheme with a main purpose of frustrating the intention of the debt cap.

Example

For example, a UK member of a group has borrowed £200 million from a bank some years before the introduction of the debt cap rules. The company has a sole commercial purpose in borrowing that money. Once the debt cap rules apply to the group, the finance expense amounts payable in respect of the borrowing are taken into account in calculating both the tested expense amount and the available amount.

A scheme is entered into by that UK company and another overseas group company. The UK company repays the £200 million and the overseas company immediately borrows the same amount. The two companies then enter into a series of structured financial products that allow the UK company to claim a taxable deduction for broadly the equivalent of the finance expense it was paying to the bank, but is not treated as finance expense for the purposes of the debt cap. The overall effect is broadly the same - the group has an external borrowing of £200 million and the UK company is bearing the cost of that borrowing. However the effect of the scheme ensures that the finance expense in respect of the £200 million borrowing remains included in the calculation of the available amount, but that amount is no longer included in the calculation of the tested expense amount.

There is a new scheme and the purpose of both the UK company and the overseas company have to be considered.