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UK consultation on taxation of debt and derivatives

 

15 July 2013

Contributed by David Stainer and Anne Powell

In early June 2013, HMRC launched a consultation on modernising the way in which the UK taxes corporate debt and derivatives. While a consultation in this area had been trailed in the UK’s 2013 Budget, the scope of the detailed proposals is surprisingly wide and, if the proposals are enacted, they will have significant impact on corporate taxpayers.

The two key drivers for the proposed changes appear to be HMRC’s ongoing programme to reduce the scope for tax avoidance, and the forthcoming move to “new UK GAAP” for UK companies which have not already adopted International Financial Reporting Standards (IFRS), which will apply from 2015 at the latest. The document proposes an ambitious timetable, with certain avoidance-focused changes to be enacted next year in the Finance Act 2014, with the more structural changes waiting until 2015.

The key aspects of the proposals are listed below:

–– a re-examination of the way in which the tax treatment of debt and derivatives relates to the accounting treatment. While the accounts will remain the starting point, it is clear that HMRC wishes to have more latitude to “go behind the accounts” if it feels an inappropriate tax outcome has resulted.

–– the proposed introduction of a single anti-avoidance rule, called a “regime TAAR”, to target arrangements with a main purpose of (broadly) exploiting the corporate debt or derivatives tax codes. This may allow the repeal of more specifically targeted measures, although that is by no means certain. In addition, HMRC wishes to strengthen the existing “unallowable purposes” rule, so that it is better defended against certain taxpayer arguments to which HMRC objects.

–– an overhaul of the way in which foreign exchange movements are taxed – the proposal is that such movements would only be taxed if they arise on loans or derivatives held for trading purposes. There are also proposals to change the way in which hedging relationships are treated for tax purposes.

–– potentially substantial changes to the way in which connected party debt and debt restructurings are taxed. Any changes here are likely to have a wide impact for taxpayers so it will be crucial for HMRC to listen carefully to feedback on the consultation. Changes are also proposed in a wide variety of other areas, including, intra-group transfers, the application of the rules to partnerships, and hybrid instruments. We expect to be involved in the consultation on the changes as it progresses.

Changes are also proposed in a wide variety of other areas, including, intra-group transfers, the application of the rules to partnerships, and hybrid instruments.

We expect to be involved in the consultation on the changes as it progresses.

 

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