CFC group finance company exemptions – guidance on new anti-avoidance provision
Fri 25 Apr 2014
F(No.2)B 2014 cl 286 inserts an anti avoidance provision into TIOPA s 371IH to counter arrangements made after 4 December 2013 exploiting the complete or partial exemption from CFC apportionment for group finance companies. HMRC have issued guidance on the new s 371IH(9A) to (9E). This guidance sets out in detail by way of examples the planning that HMRC want to frustrate, along with other situations which will not be caught.
There are three conditions in new s 371IH(9A) which, if satisfied, will exclude the affected loan relationships from being qualifying loan relationships for the CFC exemptions by new s 371IH(9B). These are:
- that a UK connected company has or had a creditor relationship with a non-UK resident connected debtor company;
- a subsequent arrangement is made directly or indirectly in connection with that UK creditor relationship (‘relevant arrangement’);
- the main purpose or one of the main purposes of the relevant arrangement is to reduce relevant UK credits or increase relevant UK debits.
HMRC’s first target is arrangements to replace double dip structures based around the US “check the box” disregard rule. The HMRC guidance notes that following the introduction of the reformed CFC rules in January 2013, some groups are using an Irish-UK-US conduit structure as a replacement to previous ‘tower’ structures. As a main purpose of the replacement will almost inevitably be to secure a reduction in loan relationship credits in a connected company, the anti-avoidance will apply.
The second set of examples is based around a group acquiring a non-resident company. The group uses UK borrowing for the purchase then re-finances using a non-resident group finance company. If the initial intention was to have this structure finance from the UK was an interim step, the anti-avoidance will not bite. However HMRC then set out a fact pattern of a group acquiring a non-resident company with UK borrowing but then being approached by tax advisers after the purchase. As a result the group then refinances using a non-resident finance company and claims the partial CFC exemption. Here HMRC would invoke the anti-avoidance provision. The message is do your planning up front with documentary evidence to back it up.
The third set is based around a group capitalising up a non-resident finance company to retire inter company short term borrowings. The examples show groups will rarely escape the anti-avoidance in this scenario. However where a non-resident group finance company is introduced to provide funding for a new purpose this may be successful.
The fourth set shows that a reduction that will reduce future taxable loan relationships credits only is also targeted. Say a UK group has tax losses and reliefs and is not tax paying, so a reduction in LR credits will not affect tax payments. However, it is expected to be tax paying in the future. An arrangement to reduce UK LR credits will clearly have no impact on current tax payable (as there is none) but nevertheless will be caught as there is no time limit as to when the reduction in taxable LR credits will/might be achieved.
Lastly for structures in place before 5 December 2013 that give a tax benefit and where any changes do not secure any new tax benefit – e.g. a new loan is made using an offshore structure on maturity of an existing loan – the anti-avoidance should not bite. Example 10 is of a group with an existing CFC funding structure set up before 5 December 2013. This is refinanced on maturity by another loan through the same structure but with a significantly lower interest rate reflecting market conditions. Although the original arrangement may well have had a main purpose of reducing UK taxable credits, as it was made before 5 December 2013 the anti-avoidance does not apply to it. Provided the changed arrangements do not have a main purpose of reducing relevant UK credits, the anti-avoidance does not apply to them either.
The tenor of this guidance is that HMRC are setting out to police the use of the finance company exemptions in the new CFC regime. Where a non-statutory clearance application is made to HMRC, HMRC are likely to be able to give a risk indication of this anti-avoidance applying. International groups contemplating new or changed offshore financing arrangements must take account of HMRC’s latest guidance.