HMRC revises profit transfer loophole fix

HM Revenue and Customs has revised its solution to a tax loophole introduced in last year’s Autumn Statement which allowed companies to avoid paying tax on profits by selling them to another group business for a minimal amount.

In the Autumn Statement, chancellor George Osborne attempted to close a tax loophole which was being exploited as an avoidance scheme.

HMRC said: “In that scheme, a company enters into a derivative contract known as a total return swap, with a parent company or another group company, generally located in a tax haven.

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“Under the contract, all of the profits of the company are paid away in return for much smaller payments back. A deduction is claimed for the payment under the contract, leaving little or no profit chargeable to tax.”

However, after the government’s measure was introduced, concerns arose regarding the effect it could have on normal commercial transactions.

As a result the government has published a revised policy, changing the title of the legislation from “Derivative contracts between group companies” to “Disguised distribution arrangements”.

Among other changes, HMRC has added a subsection which will allow such arrangements to proceed if the revenue believes it is representative of what a company carries out in the course of its business.

“This means that, for example, if a bank issued a derivative for hedging purposes, and it was a type of business which that bank (or other banks) routinely entered into in the normal course of business, then it would not fall within the clause.”

It also added that in the “vast majority of cases”, securitisation arrangements would not be caught by the legislation.