An anti-avoidance rule means that Paragraph 4 also applies (so
that a company is taxed on income as if it had held the securities)
where the company has entered into a “relevant
arrangement.”
A “relevant arrangement” is one where
This rule is to prevent bondwashing in cases where a company
sells to a creditor securities that are about to pay a dividend,
with the intention that the income transferred to the creditor will
(in whole or part) discharge a liability owed to it by the seller,
and that the seller avoids tax on that income.
Example
X Ltd (not a financial trader) owes £1m to Y Inc. It
discharges this debt by entering into an arrangement under which it
sells a holding of overseas equities to Y Inc shortly before they
pay a dividend of £1m (no withholding tax) which it has
accrued in its accounts, and buys them back after the dividend has
been paid. The transaction is not a financing one and is not
accounted for as a repo in X Ltd’s accounts.
The transaction is a relevant arrangement because X Ltd has
sold securities and bought them back, and because a main purpose is
to obtain a tax advantage, namely the avoidance of tax on the
dividend of £1m. X Ltd has received the benefit of this
dividend because it has been used to discharge its liability to Y
Inc but has not received the dividend itself: since the transaction
is not treated as a financing repo in X Ltd’s accounts, the
transaction would not be a debtor or quasi debtor repo.
Since X Ltd has discharged its liability under a relevant
arrangement, it is taxed as if it had received the real income of
£1m.
(Under the previous repo rules, such an arrangement would
have been caught by section 737A ICTA (since X Ltd would have been
deemed to receive a manufactured payment equivalent to the income
alienated under the arrangement). Since section 737A is repealed
for arrangements coming into force on or after 1 October 2007 (see
CFM17500), the new rule reproduces its
effect.)
