The term ‘tax avoidance purpose’ is defined in
FA96/SCH9/PARA13(5) as any purpose that consists in securing a tax
advantage (whether for the company or any other person). ‘Tax
advantage’ takes its meaning from Chapter I of Part XVII
ICTA88.
A tax avoidance purpose is an unallowable purpose if it is
the main purpose or one of the main purposes for which the company
is party to the relationship or has entered into a related
transaction by reference to it. Whether a tax avoidance purpose is
the main such purpose or one of the main purposes is a question of
fact that depends on all the circumstances of the particular case.
This provision is not intended to deny relief for interest
expenses incurred in pursuit of a company’s legitimate
business or commercial purposes, but it may apply to transactions
which without the relief would offer no prospect of commercial or
economic gain. Mismatch transactions in which a non-allowable or
not yet allowable expense is converted into an immediately
allowable interest expense may also be vulnerable.
The application of this provision is a matter for careful
judgement and was referred to by the Economic Secretary when this
provision went through the report stage. Her comments are recorded
in Hansard and reproduced at
INTM509060. It should not be applied
to intra-group funding transactions without prior reference to the
Thin Cap/Arbitrage Group at CT & VAT, International CT.
