UK: Financial Product Avoidance: Group Mismatches

Last Updated: 25 March 2010
Article by Deloitte Tax Group

Most Read Contributor in UK, August 2017

The measure

A discussion document has been released proposing a new 'principles-based' anti-avoidance approach to transactions that involve loan relationships and derivatives that give rise to 'group mismatches' - ie where a transaction gives rise to an asymmetry (tax deductible losses versus non-taxable profits) between companies in the same group.

This is a response to the number of schemes notified to HMRC under the tax disclosure rules in respect of loan relationships and derivatives which involve a mismatch between the taxation of two group companies. This tax asymmetry potentially gives rise to a tax advantage for the group where there is no overall corresponding economic loss.

To date HMRC's approach has been to introduce a series of complex legislative changes to counteract these schemes one by one. Today's proposal is to introduce principled-based legislation mirroring the approach of the disguised interest and transfer of income stream rules which are perceived to have been an effective way of tackling anti-avoidance.

In the discussion document, HMRC have outlined how a generic approach to counteracting asymmetric avoidance could operate. In particular, the rules could apply where:

  • there is a 'tax mismatch arrangement' between connected companies;
  • it would be reasonable to assume that the arrangement was designed to secure, either:
    • a reduction in the group's tax rate as a result of asymmetric treatment of a loan or derivative; or
    • a possible reduction in the group's effective tax rate as a result of a contingency (e.g. currency movements or another index), unless that contingency gives rise to an equivalent likelihood of an increase in the group's tax rate.

HMRC identifies that there are a number of solutions that could address such asymmetry (eg the exclusion of debits and credits, imposition of further debits and credits, or otherwise cancelling the UK tax advantage). This detail is expected to be worked through as part of the consultation process.

A key question to be considered as part of the consultation is whether this legislation should impact only UK-UK transactions or be extended to cover cross border arrangements. It will also be expected to cover the possibility of repealing various targeted anti-avoidance rules including, potentially, the arbitrage rules (or part thereof). HMRC also welcome input into whether this principle based approach would be effective, the scope of any such rule (eg whether it should be wider than UK-UK transactions, and if so, how), and whether it is appropriate to include a purpose test, or express exclusions.

Who will be affected?

Potentially all UK corporation tax payers.


Comments on the discussion document are requested by 31 May 2010. A workshop is proposed to follow in June or July 2010 and draft legislation will be released as part of the 2010 Pre-Budget Report for introduction as part of the Finance Bill 2011.

Our view

We agree with the approach to simplify what is an increasingly complex area with a growing body of targeted anti-avoidance legislation. However, the devil will be in the detail. The comprehensive consultation process which accompanied the recent disguised interest and transfer of income streams rules resulted in extensive changes to the initial proposals and it will be essential to consult widely to ensure that commercial transactions are not affected and that it is possible for taxpayers to obtain certainty.

One of the effects of the new debt cap regime (another complex set of rules) is to severely limit the types of group mismatch opportunities generally, so we would also question whether another reform process is actually needed.

Although HMRC are clear that they wish to establish symmetry within groups, it is disappointing that they do not appear to have defined, or limited this beyond, a principle of symmetry. The difficult questions and issues will be both those that they have identified for further discussion and those which cannot be identified until a clearer definition and scope has been identified. To ensure that these proposed rules do not act as another deterrent to international business being conducted with the UK, HMRC should ensure that it sets out a framework and clear scope early in the process.

The discussion document sets out that its aim is to ensure that it is only UK tax advantaged schemes that should be caught, and that a purpose test or specific exclusions might be appropriate. We agree that there need to be exclusions for commercial transactions. However, the initial suggestion of a test that is based on whether it would be reasonable to assume the arrangement is designed to reduce the group's tax rate is concerning.

Firstly, the inclusion of an 'objective purpose test' should be resisted unless there is a comprehensive clearance process (which the arbitrage rules currently provide). Secondly, this introduces a new legislative measure of how you measure a group's tax rate. In addition it appears that the question of whether there is an increase in the rate of tax requires a 'counterfactual' assumption. This inevitably is a subjective matter and is likely to give rise to disagreement between taxpayers and HMRC. Hopefully, in the pursuit of simplification, this new measure will not increase uncertainty and add to the compliance complexities for the taxpayer.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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