This week’s article looks at the regime anti-avoidance rule.
This is the eighteenth of our series of articles looking at some of the detail of the new corporate interest restriction (CIR) rules. Ministers have confirmed that the CIR legislation will be included in a Finance Bill, to be introduced as soon as possible after the summer recess, with the start date continuing to be 1 April 2017. The CIR regime contains what HMRC draft guidance describes as a regime anti-avoidance rule (RAAR) counteracting certain arrangements achieving a better result under the CIR rules than would otherwise be the case. Groups will need to consider whether the RAAR applies to any restructuring transactions that may affect the group’s overall disallowance (or reactivation) of interest under the CIR rules. The RAAR is broadly drafted and, unlike similar anti-avoidance provisions, does not contain a general exclusion for arrangements that are consistent with the principles and policy objectives underlying the CIR rules.
Overview of the RAAR
The RAAR provides that any ‘tax advantage’ that would arise from ‘relevant avoidance arrangements’ is to be counteracted by the making of such adjustments as are just and reasonable.
Arrangements are ‘relevant avoidance arrangements’ if both:
When assessing whether there is a tax advantage, ‘tax’ includes any amount chargeable as if it were corporation tax or treated as if it were corporation tax (e.g. CFC charge and bank levy) and diverted profits tax.
It should be noted that the anti-avoidance rule does not test whether there is a tax advantage solely under the CIR rules but whether there is an overall tax advantage under the taxes within its scope.
The general rule is that the RAAR applies in relation to arrangements whenever entered into (i.e. including any arrangements entered into before 1 April 2017). However, three transitional exclusions are available.
Exclusion 1 – arrangements that accelerate deductions pre-1 April 2017
The RAAR will not apply to arrangements so far as they reduce the amount that would otherwise be disallowed under the CIR rules post-1 April 2017 via paying amounts before 1 April 2017.
HMRC draft guidance says that this might involve paying interest which is deductible on a paid basis before the commencement of the CIR rules where this would otherwise be disallowed if paid post-commencement, or paying non-interest expenses, such as pension contributions, before commencement that would otherwise reduce tax-EBITDA and therefore the group’s capacity to deduct interest post-commencement of the CIR rules.
Exclusion 2 - loans being brought into the UK
The RAAR will not apply if the tax advantage can reasonably be regarded as arising wholly from arrangements entered into in connection with the commencement of the CIR rules that (but for the CIR rules) would have resulted in significantly more corporation tax becoming payable as a result of one or more loan relationships being brought within the charge to corporation tax.
HMRC draft guidance says that this might involve a group transferring interest bearing loans from a controlled foreign company (CFC) to a UK group company.
Exclusion 3 - arrangements securing CIR reliefs
The RAAR will not apply if the tax advantage that would otherwise be obtained can reasonably be regarded as arising wholly from arrangements entered into in connection with the commencement of the CIR rules that (i) are designed to secure the benefit of a relief expressly conferred by the CIR rules in a way that is wholly consistent with its policy objectives and (ii) are effected by taking only ordinary commercial steps in accordance with a generally prevailing commercial practice.
HMRC draft guidance says this might involve a group restructuring so as to (i) allow the group to be able to benefit from the public infrastructure rules or (ii) refinance debt that would not qualify as “qualifying net group-interest expense” with debt that does qualify (thereby potentially increasing the amount of interest allowable under the group ratio method), e.g. refinancing perpetual debt with debt with a fixed term of less than 50 years.
Note that even if the RAAR does not appear to apply, other existing anti-avoidance rules may also need to be considered.
The previous articles in this series can be found here:
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