Exempt classes: anti-avoidance
27.Sections 931J to 931Q contain anti-avoidance rules. Sections 931J to 931L contain rules that can prevent distributions from falling within specific exempt classes. Where sections 931M to 931Q apply they prevent distributions from being exempt at all.
28.The terms “scheme” and “tax advantage scheme” that are used in these sections are defined in section 931V. A tax advantage scheme is a scheme that has as its main purpose, or one of its main purposes, to obtain a tax advantage of more than a negligible amount.
29.Section 931J is an anti-avoidance rule that applies to dividends that fall into the section 931E exempt class (distributions from controlled companies). Section 931E mirrors the CFC control rules and so in general the protection afforded by the CFC rules minimises the risk of avoidance schemes that use distributions exempt under this class. Section 931J blocks avoidance schemes that seek to obtain exemption despite the fact that the CFC control rules did not apply at the time when the profits included in the dividend were earned.
30.Section 931J applies only where there is a scheme or arrangement that has as a main purpose to obtain exemption under section 931E. For example, it would apply to the following type of scheme:
a group company that is outside the scope of the CFC rules receives income that is diverted from the UK under an avoidance scheme or arrangement;
the company is then brought under the control of a UK member of the group in order to allow subsequent dividends to fall within the section 931E exempt class; and
a dividend is paid out of the company’s distributable profits, which include those diverted from the UK during the pre–control period.
31.Where it applies, this section prevents a distribution from being exempt by virtue of the controlled companies exempt class. It will not prevent a distribution from being exempt by virtue of any other class.
32.If a dividend is paid as part of a scheme that falls within this section and the company has any pre-control profits, this anti-avoidance rule will apply. However, once those pre-control profits have been fully paid out in the form of taxable dividends, the anti-avoidance rule will cease to apply to any subsequent dividend (or part dividend).
33.As with section 931H, if the section applies to part but not all of a dividend, it is treated for the purposes of both Part 9A and Part 18 of ICTA as if it were two dividends.
34.There is a transitional rule in Part 3 of this Schedule that prevents any profits earned more than 12 months before the commencement date for the Schedule (that is, before 1 July 2008) from being treated as pre-control profits. Any dividend paid out of such profits will therefore not fall within this anti-avoidance rule.
35.Section 931K is an anti-avoidance rule that applies to dividends that fall within the section 931F exempt class (distributions in respect of non-redeemable ordinary shares). It applies only where there is a scheme or arrangement that has as a main purpose to obtain exemption under section 931F.
36.The anti-avoidance rule in this section will apply if rights are obtained under an avoidance scheme that are equivalent to the rights of either a preferential shareholder or a holder of a redeemable share.
37.Where it applies, this section prevents a distribution from being exempt by virtue of the non-redeemable ordinary shares exempt class. It will not prevent a distribution from being exempt by virtue of any other class.
38.Section 931L is an anti-avoidance rule that applies to dividends that fall within the section 931G exempt class (distributions in respect of portfolio holdings). It applies only where there is a scheme or arrangement that has as a main purpose to obtain exemption under section 931G.
39.The anti-avoidance rule in this section will apply if a shareholding that would be too large to qualify for the portfolio holdings exempt class is split between a number of connected companies in order that each company’s holding falls below the 10 per cent threshold given in section 931G.
40.Where it applies, this section prevents a distribution from being exempt by virtue of the portfolio holdings exempt class. It will not prevent a distribution from being exempt by virtue of any other class.
41.Section 931M is an anti-avoidance rule that applies to distributions that arise from a tax advantage scheme (see section 931V) and that are part of an arrangement that yields a return economically equivalent to interest.
42.Subsection (1) excludes from the anti-avoidance rule any distribution that is exempt by reason of section 931E (distributions from controlled companies). Subsection (6) restricts the section to cases where there is a connection between the recipient and payer.
43.Subsection (7) defines the meaning of “connection” in subsection (6) by reference to an amended loan relationship definition of “connected company” in section 466. The reason for using the loan relationship definition is to ensure that section 931M has sufficient scope to cover all those cases where loan relationships legislation is disapplied by reason of a connected person rule, but there is a risk that the CFC rules may not apply because of an absence of control of the payer by the recipient.
44.The definition of “economically equivalent to interest” in this section is aligned with that given in section 486B of CTA, which is being introduced by Schedule 24 of this Act (section 48).
45.Section 931N is an anti-avoidance rule that applies to tax advantage schemes (see section 931V) that include a deduction given under any foreign tax law in respect of an amount calculated by reference to a distribution.
46.There are rules in sections 931B(c) and 931D(c) that deny exemption for any distribution that itself qualifies for a foreign tax deduction. This section prevents those rules being sidestepped through avoidance schemes that arrange for tax deductions to be given indirectly.
47.Section 931O is an anti-avoidance rule that applies to tax advantage schemes (see section 931V) involving payments for distributions. The language of this section is similar to that used in section 125 of ICTA, which was amended in 2005 in response to avoidance schemes involving annual payments. This section introduces a rule that will deny exemption in any case where the recipient or a person connected to the recipient makes a payment or gives up income in return for a distribution.
48.Section 931P is an anti-avoidance rule that guards against the risk that the terms on which goods or services are provided might be varied in a way that reduces taxable profits in return for a right or expectation that a distribution will be paid to compensate for the lost profits. It applies where there is a tax advantage scheme (see section 931V) that involves the payment of a distribution, but does not apply in any case where the transfer pricing rules in Schedule 28AA to ICTA cancel the tax advantage arising from the variation in terms.
49.Section 931Q is an anti-avoidance rule that denies exemption to distributions that have been artificially diverted from a company (referred to as “C” in the section) for which the distribution would have been a trade receipt. Part 9A does not apply to distributions that are trade receipts (although there is a special rule for insurance companies in paragraph 22 of this Schedule that has an equivalent effect), which are instead taxable as part of trade profits. This might create an incentive for a trading company to divert distributions that are trade receipts to a different company in order to obtain exemption under Part 9A.
50.The section applies only where there is a scheme or arrangement that has as a main purpose to obtain Part 9A exemption and where it is reasonable to assume that the distribution would have represented a trade receipt of C. Subsections (3) and (4) require that in considering whether it is reasonable to make this assumption, it must be assumed that C was a party to any transactions giving rise to the distribution.
