EGL80000 - Anti-avoidance rule

F(2)A23/S308 is an anti-avoidance rule which allows HMRC to counteract the effect of any arrangements with a main purpose of reducing or avoiding liability to the EGL including avoiding the effect of any of the EGL rules.

Scope of the rule

The rule applies where there are arrangements with a main purpose of reducing or avoiding liability to the EGL, including arrangements to avoid the effect of any of the rules for the levy. Where the rule applies then such adjustments can be made as are necessary to counter the effect of the arrangements. The adjustments can be made by HMRC or by the affected company, say by way of amending a self-assessment.

F(2)A23/S308(3) makes clear that the rule applies to arrangements that result in a change to the composition of a group, in which case the adjustments may be made as if the change had not taken place. This rule could apply, for example, where a group generating undertaking operating a number of generating stations is split up so that each generating station is instead held in a separate company each owned by the same shareholders as the original group. That would result in each company obtaining its own annual allowance. Where the anti-avoidance rule applies to such circumstances then the separate companies will still be treated as a single group generating company when determining liability to the levy.

Arrangements

The term “arrangements” is widely drawn to include any agreement, understanding, scheme, transaction or series of transactions, whether or not legally enforceable.

Whether a transaction forms part of a series of transactions, or a scheme, or an arrangement is in general a question of fact, but this conclusion will follow in any case where one transaction would not have taken place without another transaction, or would have taken place on different terms without that other transaction. However, it is not necessary that transactions must depend on each other in this way in order that they form part of a scheme or arrangements.

Avoidance of EGL liability

It is a condition for the anti-avoidance rule to apply that the main purpose, or one of the main purposes, of any arrangements is to reduce or avoid a charge to the EGL or avoid the effect of the legislation. The term “EGL advantage” is used to cover these effects in the following guidance.

In considering what the purposes of a set of arrangements are, one looks more widely than the subjective intentions of the participants, being what was in their own minds. That is a relevant consideration, but there are also objective elements to be taken into account; one looks at all the evidence, including the features of the scheme, the way the scheme was marketed, and the views of those who were involved in creating, promoting and advising on the scheme and so on. An examination of the relevant facts and circumstances would include consideration of the purpose of the participants in using the arrangements, along with such matters as why the arrangements took the form they did, how those who devised the arrangements hoped they would work, and the way in which they were promoted to potential participants. Where this consideration shows a main purpose was to obtain an EGL advantage, that will constitute a main purpose of the arrangements.

There is no one factor that determines whether obtaining the EGL advantage is a main purpose of an arrangement. All the circumstances in which the arrangements were entered into need to be taken into consideration. The circumstances might include:

  • The overall commercial purpose: this should be considered not only from the perspective of individual participants in the arrangements, but also from any wider perspective. For these purposes an economic objective does not include tax motivated reasons.
  • Whether this objective is one which the parties involved might ordinarily be expected to have, and which is genuinely being sought.
  • Whether the objective is being fulfilled in a straightforward way or whether the introduction of any additional, complex or costly steps would have taken place were it not for the avoidance of EGL.

The straightforward application of the EGL legislation, such as simply claiming of exceptional costs or the ordinary use of the surrendered shortfalls would not bring arrangements within the anti-avoidance rule. Equally, that an arrangement has the effect of reducing liability to the EGL is not enough in itself to show that the arrangements have a main purpose of obtaining an EGL advantage.

For instance, where there is evidence that a generator considered two ways to achieve an economic objective and chose on economic grounds to pursue one of them, the mere fact that there was a beneficial difference in terms of liability to the EGL would not in itself meet the main purpose test. Where the potential EGL treatment was a factor in choosing between alternative arrangements, then it would still be necessary that obtaining an EGL advantage was a main purpose to the arrangements. There may be situations, however, where the advantage secured through undertaking one set of arrangements rather than another is so significant that this indicates that obtaining the and EGL advantage EGL was a main purpose. This is unlikely to be the case where the arrangements chosen do not involve additional, complex or costly steps included solely to secure or enhance a reduction in EGL liability.

Hence it will be relevant to draw a comparison in order to consider whether, in the absence of the consequences for EGL liability:

  • the transaction giving rise to the EGL advantage would have taken place at all;
  • if so, whether the EGL advantage would have been of the same amount; and
  • whether the transaction would have been made under the same terms and conditions.

Further guidance on the meaning of “arrangements” can be found in HMRC’s Compliance Handbook at CH81124 and at section C3 of the General Anti-Abuse Rule guidance.