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Finance Act 2014

Section 29: Disguised Distribution Arrangements Involving Derivative Contracts


1.This section stops tax avoidance schemes involving total return swaps. Where arrangements are entered into involving total return swaps or other derivative contracts, and the effect of the arrangements is to transfer profits of a company to other group companies, this measure will prevent any deduction being given for payments under the arrangements.

Details of the Section

2.Subsection (1) introduces a new section 695A into Chapter 11 of Part 7 of the Corporation Tax Act 2009.

3.Section 695A(1) sets out the circumstances in which section 695A applies. These circumstances are set out in subsections (1)(a) to (1)(e).

4.Section 695A(1)(a) sets out the first condition, which is that a company A is party to arrangements involving derivative contracts.

5.Section 695A(1)(b) sets out the second condition, which is that another company B is also a party to the arrangements.

6.Section 695A(1)(c) sets out the third condition which is that companies A and B are members of the same group.

7.Section 695A(1)(d) sets out the fourth condition, which is that as a result of the arrangements there is a payment from A to B of all or a substantial part of the profits of a company which is a member of a group with A or B or both. The payment can be in substance, can be either the whole or a significant part, and can be direct or indirect.

8.Subsection 695A(1)(e) sets out the fifth condition, which is that the arrangements are not arrangements of a kind which companies carrying on the same kind of business as company A would enter into in the ordinary course of that business.

9.Section 695A(2) provides that debits arising in these circumstances are not to be brought into account.

10.Section 695A(3) applies to credits arising from the arrangements. It provides that credits arising will not be brought into account, but only to the extent that they do not exceed debits arising from the same arrangements which have not been brought into account as a result of subsection (2).

11.Section 695A(4) provides an exclusion from subsection (3) in respect of credits only. It provides that, notwithstanding subsection (3), a credit can be brought into account if it arises from tax avoidance arrangements.

12.Section 695A(5) sets out when companies are in the same group for the purposes of section 695A.

13.Subsection 695A(6) sets out definitions of some terms used in Section 695A.

14.Subsections (2) to (6) of this section contain commencement provisions.

15.Subsection (2) provides that the section has effect in relation to accounting periods beginning on or after 5 December 2013, subject to subsections (3) to (6).

16.Subsection (3) provides that for companies which have accounting periods straddling 5 December 2013, the parts of the accounting period falling before and after that date are treated as separate accounting periods.

17.Subsection (4) provides that the sections do not have effect for debits arising from the arrangements to the extent that credits arising from the same arrangements were brought into account for accounting periods ending before 5 December 2013.

18.Subsection (5) provides that for credits to which subsection (6) applies, the legislation is to have effect as though section 695A (2) referred to credits and debits.

19.Subsection (6) sets out the credits to which subsection (5) applies.  It provides that they are those credits which would have been brought into account if the companies had an accounting period beginning with 5 December 2013 and ending with 22 January 2014.

Background Note

20.This measure closes a tax avoidance scheme using derivative contracts.

21.The schemes targeted by the measure involve the use of a derivative contract described as a total return swap under which payments are made, and a deduction is claimed for payments under the total return swap. The payments involved are in substance distributions of profits.  It will apply to any arrangements involving any derivative contract which have the effect of making a payment of all or a significant part of the profits of a company to another company in the same group. The effect of the legislation will be to make it clear that no deduction is due for payments of this nature.

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