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Avoidance involving the transfer of corporate profits – or how to crack a small nut with a really big hammer

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Those reading the small print in the Autumn Statement 2013 may remember that, tucked away, was a new anti-avoidance measure aimed at schemes where a derivative contract (a total return swap, in effect) was being used to allow a UK company to claim deductions for profit-linked payments to another group company in a tax haven – essentially stripping profits from the UK tax net.

No one who wasn’t involved in the schemes probably paid much attention to the proposed new s 695A in CTA 2009 to be introduced by Finance Bill 2014. We should all be paying attention now.

In a new measure announced with effect from today (to insert a new s 1305A in CTA 2009 before s 695A is even enacted), HMRC has decided that, since it has heard of new avoidance schemes being worked up to get around s 695A, it is going to hit them hard. All very admirable, except in the way HMRC has gone about it.

What the new proposed s 1305A says is that if:

  • two companies in the same group (A and B);
  • are party to any arrangements (widely defined to include just about anything, and they do not have to be parties at the same time either);
  • the arrangements effectively result in A directly or indirectly paying to B a significant part of A’s business profits or a fellow group member’s profits (the so-called ‘profit transfer’); and
  • one of the main purposes of the arrangements is to secure a tax advantage for anyone involving the profit transfer;
  • then A’s corporation tax profits must be re-calculated as if the arrangements had not occurred.

Note that the measure only works one way and (I imagine for EU law reasons) there is no reference to movement of funds cross-border – if A and B are UK companies and A suffers an upwards adjustment, B does not get a corresponding allowance.
Clearly, this new rule will help HMRC to put a stop to these particular schemes, and a good thing too, but at what cost? Some adverse implications of this new rule spring to mind.

It is yet another – in this case quite extreme – example of HMRC’s growing trend to put out very widely drawn legislation and then expect us all to rely on guidance to fall outside it. That would be fine, if we could be sure that HMRC won’t withdraw that guidance when it feels like it – just ask Mr Gaines-Cooper.

Perhaps conscious that the widely drawn rule may cause alarm, the guidance in the technical note has a few examples. ‘Fear not,’ it seems to say, ‘if you don’t have an anti-avoidance purpose you’ve got nothing to worry about.’ If purpose is really the key point here, why isn’t HMRC relying on the GAAR or even the old FA 2002 Sch 26 para 23 (still on the books as CTA 2009 s 690)?

As drafted, conscientious tax managers may need to think about going through a compliance exercise on their intra-group arrangements to be happy that nothing they’ve done is likely to fall foul of this. If one felt suspicious, one might even think this a concealed attempt to have an extra weapon for HMRC’s arsenal in the BEPS debate. In this regard, I leave you with a thought to consider: if company B in Luxembourg agrees to provide services to company A in the UK, and company B (taxed in the EU at lower rates than A) gets paid a hefty price for its assistance, is company A definitively inside or outside this new rule? Amazon, beware.