Part XVII ICTA 1988 includes various anti-avoidance provisions
including Section 787. This restricts relief for interest paid
under a scheme from which the sole or main benefit which might be
expected to accrue is the reduction of tax resulting from the
relief, including group relief. Although this appears to be a far
reaching section which could be used against many avoidance
schemes, its usefulness is somewhat restricted.
The provision was introduced to counteract a specific
domestic avoidance scheme to get relief on `manufactured' interest
by paying interest in advance on a borrowing which was effectively
immediately repaid. It is necessary to distinguish between an
out-and-out avoidance scheme and a judiciously arranged borrowing
scheme. The section is not, therefore, easily invoked but it may
still be legitimate to use it in some cases involving intra-group
funding transactions.
Business Tax specialists should always be consulted before
the section is used and CT & VAT, International CT also expect
a copy of the report where there are thin capitalisation or
transfer pricing considerations.
