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Group Mismatch Schemes and other Corporation Tax proposals


A generic principles-based approach to group mismatch schemes was first proposed in March 2010 and HMRC held an open day in the summer to discuss possible approaches. While a number of comments made at the open day have been reflected in the draft legislation, not all of the concerns have been dealt with. The legislation is not intended to be implemented until the Finance Bill 2011 receives Royal Assent and comments are invited before 9 February 2011.

HMRC have also published draft legislation, which is effective from 6 December 2010, dealing with one particular example of a group mismatch scheme involving intra-group funding provided by convertible securities. This legislation will be superseded by the generic principles-based proposal referred to above.

A generic-principles based approach to the derecognition of loan relationships and derivative contracts was also proposed earlier this year, on 6 July. There was a concern that the original proposal, which did not include any requirement for an avoidance purpose, was too far-reaching and might impact normal commercial transactions. HMRC have responded to this concern by including a tax avoidance test. The legislation is effective from 6 December 2010.

The prospect of a general anti-avoidance rule was last considered by the previous Government over a decade ago. The current Government announced in June this year, as part of the Emergency Budget, that it would examine again whether such a rule should be implemented. After a period of informal consultation, the Government has asked Graham Aaronson QC to lead a study on the merits of the proposal.

Financial Products Avoidance: Group Mismatches

HMRC has published draft legislation containing provisions for a generic or principles-based approach to counter group mismatch schemes.

The draft legislation would apply to an arrangement to which two or more members of a group are parties where:

  • it is practically certain that the arrangement will secure an economic (that is, post-tax) profit for the group which arises as a result of asymmetries between the way different members of the group bring into account loan relationship or derivative contract credits and debits; or
  • the purpose or one of the main purposes of the arrangement is to obtain the chance to secure such an economic profit.

Asymmetries include both absolute and timing differences. Loan relationship and derivative contract debits and credits which either give rise to the economic profit or might have given rise to the economic profit (if the arrangement had been successful) are disregarded. The draft legislation will apply to arrangements whether entered into before or after the legislation is implemented.

It is likely that the current proposal would have a far-reaching impact on groups of companies. Even where there is no tax avoidance purpose, groups would need to consider whether arrangements involving debt finance or derivatives are practically certain to produce for the group a tax advantage from asymmetries.  The proposal does not just apply to purely intra-group arrangements but also to arrangements entered into with third parties to which more than one member of the group are parties. It is hoped that the legislation will be refined and become more focussed before it is implemented next year.

Loan relationships involving connected creditor and debtor where debits exceed credits

Draft legislation which applies to a specific group mismatch scheme has also been published, with effect from 6 December 2010. The legislation amends sections 418 and 419 CTA 2009. Sections 418 and 419 are intended to counter arrangements that involve the provision of intra-group finance through the use of convertible securities in circumstances where a group mismatch arises because the debtor and the creditor use different accounting standards. The change will now take into account the affect of the arrangements on persons connected with the creditor, including controlled foreign companies.

Derecognition of loan relationships and derivative contracts

Provisions relating to the derecognition of loan relationships and derivative contracts were first introduced in 2006 and have since been extended regularly to counter specific variants of the basic scheme.

The draft legislation published on 6 December takes a more generic principles-based approach and would apply to the derecognition of a creditor loan relationship or a derivative contract in circumstances where the derecognition is as a result of arrangements the purpose or one of the main purposes of which is to obtain a tax advantage. Credits and debits are to be computed as if the creditor loan relationship or derivative contract had not been derecognised. The draft legislation also provides that debits arising on the derecognition itself will be disallowed.

The tax avoidance test was not contemplated when these provisions were first proposed earlier this year. The inclusion of this test is helpful in that the provisions should not apply to normal commercial transactions. The legislation is effective from 6 December 2010.

Study of a General Anti-Avoidance Rule

The Government has asked Graham Aaronson QC to lead a study on the merits of the implementation of a general anti-avoidance rule in the United Kingdom. The study is due to be completed and presented to the Government on 31 October 2011. The Government has confirmed that following the completion of this study it will not introduce a general anti-avoidance rule without further formal public consultation.




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