Part 6: Tax arbitrage
Overview
452.This Part rewrites sections 24 to 28 and 30 of, and Schedule 3 to, F(No 2)A 2005, which were enacted to counteract avoidance involving tax arbitrage (“the tax arbitrage provisions”).
453.Different jurisdictions have different tax regimes, and different tax regimes often treat the same transaction in different ways. Multinational groups can arrange their affairs to take advantage of such discrepancies: this practice is called “tax arbitrage”. In tax arbitrage, the multinational group benefits at the expense of one or more of the fiscs.
454.The provisions in this Part have to be specifically activated by a notice from HMRC.
455.In general, the tax arbitrage provisions apply where an arbitrage scheme using a hybrid entity or instrument results in:
a double deduction for the same expense, or a UK deduction for the payer in circumstances where the recipient is not taxed on the receipt (because, for example, a tax credit has eliminated a liability to tax); or
amounts being received by a company in a way that would not otherwise be taxable in the UK.
456.The hybrid entity or instrument will usually have been used deliberately to achieve one of these results.
457.The tax arbitrage provisions deal separately with deduction cases and receipts cases.
458.The sections in this Part are laid out in the following order.
Section 231 introduces the Part.
Sections 232 to 235 are about deduction notices.
Sections 236 to 242 are about the kinds of schemes which may be counteracted by deduction notices.
Sections 243 to 248 are about the consequences of deduction notices.
Sections 249 to 254 are about receipt notices.
Sections 255 to 257 make general provision about deduction notices and receipt notices.
Sections 258 and 259 are interpretative.
Section 231: Overview
459.This section introduces the Part and summarises its structure. It is new.
Section 232: Deduction notices
460.This section says when an officer of Revenue and Customs may give a company a deduction notice. It is based on section 24(1) and (2) of F(No 2)A 2005.
461.Briefly, the officer may give a company a deduction notice if the officer considers, on reasonable grounds, that the “deduction scheme conditions” are or may be met in relation to a transaction to which the company is party.
462.Section 24(1) of F(No 2)A 2005 gives this function to the Commissioners for HMRC. In practice, the Commissioners delegate this function to officers of Revenue and Customs, and subsection (1) reflects this. See Change 2 in Annex 1.
463.Because Change 2 is made in section 232, it is also made in sections 235, 255 and 256.
464.Section 24(2) of F(No 2)A 2005 provides that the company has to be within the charge to corporation tax. This condition is rewritten more succinctly in subsection (1).
465.Subsection (2) defines the expressions “deduction notice” and “the deduction scheme conditions”.
466.Subsection (3) signposts the consequences of a deduction notice.
Section 233: The deduction scheme conditions
467.This section specifies the “deduction scheme conditions”. It is based on section 24(3) to (6) of, and paragraph 1 of Schedule 3 to, F(No 2)A 2005.
468.The source legislation labels these conditions “conditions A to D”. These labels have been retained.
Section 234: Schemes achieving UK tax advantage for a company
469.This section defines when a scheme achieves a UK tax advantage for a company. It is based on section 30(2) to (4) of F(No 2)A 2005.
470.The references in the source legislation to income tax are redundant and are not rewritten.
471.Section 30(3) of F(No 2)A 2005 refers to “a tax credit”. By virtue of section 832(1) of ICTA, this has the meaning given by section 231 of that Act. Subsection (2) accordingly refers to the provision of CTA 2010 which is based on section 231 of ICTA.
Section 235: Further provisions about deduction notices
472.This section makes further provisions about deduction notices. It is based on section 24(7) and (8) of F(No 2)A 2005.
473.Subsections (1) and (2) refer to an officer of Revenue and Customs. See the commentary on section 232 and Change 2 in Annex 1.
Section 236: Schemes involving hybrid entities
474.This section is the first of a group of seven sections defining types of “deduction scheme” (see condition A in section 233(2)). It is based on paragraphs 2 and 3 of Schedule 3 to F(No 2)A 2005.
Section 237: Instruments of alterable character
475.This section is the second in a group of seven sections defining types of “deduction scheme”. It is based on paragraphs 4 and 5 of Schedule 3 to F(No 2)A 2005.
Section 238: Shares subject to conversion
476.This section is the third in a group of seven sections defining types of “deduction scheme”. It is based on paragraphs 4 and 6 of Schedule 3 to F(No 2)A 2005.
477.Paragraph 6(1)(a) and (b) of Schedule 3 to F(No 2)A 2005 define a scheme, in two alternative ways, by reference to “shares subject to conversion”. This two-part definition is rewritten in subsection (1).
478.Paragraph 6(2) of Schedule 3 to F(No 2)A 2005 defines “shares subject to conversion”, using the expression “the relevant time”. This definition is rewritten in subsections (2) to (4).
479.Paragraph 6(3) of Schedule 3 to F(No 2)A 2005 defines “the relevant time” for the purposes of paragraph 6(2) of that Schedule.
480.The definition of “the relevant time” in paragraph 6(3)(a) of Schedule 3 to F(No 2)A 2005 only applies to cases within paragraph 6(1)(a) of that Schedule, and the definition of “the relevant time” in paragraph 6(3)(b) of that Schedule only applies to cases within paragraph 6(1)(b) of that Schedule. But the source legislation does not make this distinction immediately obvious. Accordingly, subsections (5) and (6) rewrite paragraph 6(3)(a) and (b) as two separate propositions applying, respectively, for the purposes of the two alternative cases in subsection (1).
Section 239: Securities subject to conversion
481.This section is the fourth in a group of seven sections defining types of “deduction scheme”. It is based on paragraphs 4 and 7 of Schedule 3 to F(No 2)A 2005.
482.Subsections (5) and (6) rewrite paragraph 7(3)(a) and (b) of Schedule 3 to F(No 2)A 2005 as two separate propositions. See the commentary on section 238 concerning the rewrite of paragraph 6(3) of that Schedule.
Section 240: Debt instruments treated as equity
483.This section is the fifth in a group of seven sections defining types of “deduction scheme”. It is based on paragraphs 4 and 8 of Schedule 3 to F(No 2)A 2005.
Section 241: Scheme including issue of shares not conferring qualifying beneficial entitlement
484.This section is the sixth in a group of seven sections defining types of “deduction scheme”. It is based on paragraphs 9 and 10 of Schedule 3 to F(No 2)A 2005.
Section 242: Scheme including transfer of rights under a security
485.This section is the last in a group of seven sections defining types of “deduction scheme”. It is based on paragraphs 9 and 11 of Schedule 3 to F(No 2)A 2005.
486.“Security” is defined for the purposes of the Part in section 259. That definition is based on paragraph 11(6)(a) of Schedule 3 to F(No 2)A 2005. For the purposes of this section, that definition is extended by subsection (8), which is based on paragraph 11(6)(b) of that Schedule.
Section 243: Consequences of deduction notices
487.This section sets out the consequences of a deduction notice being given. It is based on section 25(1), (2) and (14) to (16) of F(No 2)A 2005.
488.Subsection (1) says when this section applies.
489.Subsection (2) obliges the company to calculate (or recalculate) its income or chargeable gains for the purposes of corporation tax or its liability to corporation tax.
490.Subsection (3) stipulates that the calculation (or recalculation) must be done in accordance with the rule against double deduction (section 244) and, if appropriate, the rule against deduction for untaxable payments (section 248).
491.If the company considers that the deduction scheme conditions are in fact not met in relation to the transaction specified in the deduction notice, the company can make (or decide not to amend) its company tax return on the basis that the deduction notice is invalid. It is then up to HMRC to open an enquiry into the return if it considers the notice still to be valid.
492.If, however, the company concedes that the deduction notice is valid, it can adjust its company tax return. Subsection (4) provides that (so far as the scheme specified in the deduction notice is concerned) the company is treated as having complied with subsections (2) and (3) if it incorporates “the necessary relevant adjustments” in its company tax return for the accounting period specified in the notice.
493.Subsection (5) defines when adjustments are “relevant”.
494.Subsection (6) defines when relevant adjustments are “necessary”.
Section 244: The rule against double deduction
495.This section sets out the rule against double deduction referred to in section 243(3)(a). It is based on section 25(3) to (5) and (17) of F(No 2)A 2005.
496.To the extent to which an amount in relation to an expense is “otherwise deductible or allowable”, subsection (1) restricts the amount allowable as a deduction.
497.Subsection (2) defines “otherwise deductible or allowable”, by reference to the purposes of any tax to which this subsection applies.
498.Subsection (3) provides that subsection (2) applies to any tax (including any “non-UK tax”), with two exceptions. The two exceptions relate to oil taxation because, in that area, the United Kingdom tax system envisages relief being obtained for the same amount twice.
499.Subsection (4) extends the scope of subsection (2) to cover amounts for which relief (a) is not available but (b) would be available but for a “tax rule” that has the same effect as the rule in subsection (1).
500.The definition of “tax rule” is given in subsection (5).
Section 245: Application of the rule against deduction for untaxable payments
501.This section sets out the conditions for the rule against deduction for untaxable payments to apply. It is based on section 25(6) and (17) of F(No 2)A 2005.
502.Under subsection (1), the rule applies if three conditions are all met. These conditions are set out in subsections (2) to (4).
503.In section 25(6)(c) of F(No 2)A 2005, the phrase “as a result of provision made or imposed by the scheme” appears to qualify “is not liable to tax” as well as “his liability to tax is reduced”. But it does so by implication rather than explicitly. Subsection (4) makes this explicit. This is a minor change in the law, in the taxpayer’s favour: see Change 9 in Annex 1.
Section 246: Cases where payee’s non-liability treated as not a result of scheme
504.This section makes further provision about condition C in section 245. It is based on section 25(7) to (10) of F(No 2)A 2005.
Section 247: Cases where payee treated as having reduced liability as a result of scheme
505.This section makes further provision about condition C in section 245. It is based on section 25(7) of F(No 2)A 2005.
Section 248: The rule against deduction for untaxable payments
506.This section sets out the rule against deduction for untaxable payments referred to in section 243. It is based on section 25(11) to (13) of F(No 2)A 2005.
507.Subsection (1) states that the rule is that “the total deduction amount” must be reduced.
508.Subsection (2) defines “the total deduction amount”.
509.If the payee is not liable to tax at all in respect of the payment or payments under review, subsection (3) reduces the total deduction amount to nil.
510.Subsections (4) and (5) deal with the case in which the payee is liable to tax in respect of part, but not all, of the payment or payments under review.
Section 249: Receipt notices
511.This section says when an officer of Revenue and Customs may give a company a receipt notice. It is based on section 26(1) of F(No 2)A 2005.
512.Briefly, the officer may give a UK resident company a receipt notice if the officer considers, on reasonable grounds, that the “receipt scheme conditions” are or may be met in relation to the company.
513.Section 26(1) of F(No 2)A 2005 gives this function to the Commissioners for HMRC. In practice, the Commissioners delegate this function to officers of Revenue and Customs, and subsection (1) reflects this. See Change 2 in Annex 1.
514.Because Change 2 is made in section 249, it is also made in sections 252, 255 and 256.
515.Subsection (2) defines a “receipt notice” and “the receipt scheme conditions”.
Section 250: The receipt scheme conditions
516.This section specifies the “receipt scheme conditions”. It is based on section 832(3) of ICTA and sections 26(2) to (5), (8), (11) and (13) and 27(4) of F(No 2)A 2005.
517.Section 26(5) of F(No 2)A 2005 uses the expression “tax purposes”, and by virtue of section 832(3) of ICTA “tax” in that context means “income tax or corporation tax”. Elsewhere in the Part, however, “tax purposes” is used with a different meaning. Accordingly, to prevent possible confusion, subsection (6) expands “tax purposes” to “income tax purposes or corporation tax purposes”.
518.Section 26(4) of F(No 2)A 2005 provides: “Condition C is that, as regards the qualifying payment made by the paying party, there is an amount that … may be deducted or otherwise allowed in respect of the payment under the tax law of any territory outside the United Kingdom.” The definition of “deductible amount” in subsection (7) omits as otiose the italicised words.
Section 251: Amounts within corporation tax
519.This section supplements section 250(3) and (5). It is based on section 26(8), (9), (10) and (14) of F(No 2)A 2005.
520.Section 26(9)(a) of F(No 2)A 2005 refers to “the accounting period in which the qualifying payment was made in relation to the company”. Subsection (2)(a) omits as otiose the italicised words.
Section 252: Further provisions about receipt notices
521.This section makes further provisions about receipt notices. It is based on section 26(12) of F(No 2)A 2005.
522.Subsections (1) and (2), refer to an officer of Revenue and Customs. This is a minor change in the law: see the commentary on section 249 and Change 2 in Annex 1.
Section 253: Exception for dealers
523.This section provides an exception for some dealers who would otherwise meet condition D of the receipt scheme conditions. It is based on section 26(6) and (7) of F(No 2)A 2005.
Section 254: Rule for calculation or recalculation of income etc following receipt notice
524.This section gives the rule for calculating or recalculating income, chargeable gains or liability to corporation tax following a receipt notice. It is based on section 27 of F(No 2)A 2005.
Section 255: Notices given before tax return made
525.This section meshes the tax arbitrage legislation in with the machinery of Self Assessment in cases in which a deduction notice or a receipt notice is given before the company’s company tax return is made for the accounting period specified in the notice. It is based on section 28(1), (2) and (11) of F(No 2)A 2005.
526.Subsection (1) reflects the fact that deduction notices and receipt notices are to be given by officers of Revenue and Customs. This is a minor change in the law: see the commentary on sections 232 and 249 and Change 2 in Annex 1.
Section 256: Notices given after tax return made
527.This section meshes the tax arbitrage legislation in with the machinery of Self Assessment in cases in which a deduction notice or a receipt notice is given after the company’s company tax return has been made for the accounting period specified in the notice. It is based on section 28(3) to (7) and (12) of F(No 2)A 2005.
528.Subsections (1), (2) and (6) reflect the fact that deduction notices and receipt notices are to be given by officers of Revenue and Customs. This is a minor change in the law: see the commentary on sections 232 and 249 and Change 2 in Annex 1
529.Section 28(7) of F(No 2)A 2005 refers to the company being requested “to produce or provide information”. It is, however, not possible for a company to produce information without providing it. Subsection (6)(a) therefore omits “produce or” as superfluous.
Section 257: Amendments, closure notices and discovery assessments where section 256 applies
530.This section concerns amendments to company tax returns, closure notices and discovery assessments in cases in which section 256 applies. It is based on section 28(8) to (11) of F(No 2)A 2005.
Section 258: Schemes and series of transactions
531.This interpretative section is based on section 30(1) of F(No 2)A 2005.
Section 259: Minor definitions
532.This interpretative section is based on sections 25(18) and 28(12) of F(No 2)A 2005 and paragraphs 6(4), 7(4), 11(6) and 12 of Schedule 3 to that Act.
533.For the purposes of paragraphs 6, 7 and 11(6)(a) of Schedule 3 to F(No 2)A 2005, “security” has the same meaning as in Part 6 of ICTA. Section 254(1) of that Act defines “security” for the purposes of that Part of that Act. Section 254(1) of that Act is rewritten in section 1117(1) of CTA 2010, to which subsection (1) accordingly refers.
