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Finance Act 2014

Background Note

11.Section 1305A applies a tax avoidance test to any arrangements entered into for what is in substance a transfer of profit between companies in the same group.

12.The measure follows the announcement of section 695A CTA 2009 on                        5 December 2013, to be introduced in Finance Act 2014 with effect from the date of announcement.

13.This measure does not apply to transactions that fall within section 695A CTA2009, which closes down an avoidance scheme.   In the 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.   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.

14.Section 1305A in contrast applies irrespective of the mechanism by which profits are transferred and is therefore not limited to payments under a total return swap. It can apply to a wider range of arrangements than section 695A but unlike that section is subject to a test which requires the arrangements to have a tax avoidance purpose.

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