Examples of how the GAAR applies to tax arrangements

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• Company B grants a call option to a company connected to Company A under which the connected party can require Company B to sell it the plant or machinery also for 98. In practice the terms of the fee arrangements between Companies A and B will lead to the put option being exercised. The call option is a guarantee mechanism to ensure that if that is not the case the group of which Company A is a member will continue to have use of the plant or machinery. 2.2.3 The relevant tax provisions Sections 11, 70C and 70E, Capital Allowances Act 2001 (“CAA 2001”) 2.2.4 The taxpayer’s tax analysis • The leaseback (despite its short duration) falls within the long funding lease rules, with the result that Company A is entitled to claim capital allowances on the present value of the rental payments plus the RVG amount. (The present value of the rental payment is 2, so in total 100 goes into Company A’s capital allowances pool). • The exercise of the put option is a disposal event with the result that a disposal value has to be calculated. Company A claims that this disposal value excludes the put option payment as a “RVG” amount. As a result, 98 of the original capital expenditure of 100 remains in the capital allowance pool. • Company A also claims that the cost of acquisition of the plant under the put option is qualifying expenditure under section 11, CAA 2001 with the result that a separate claim arises in respect of the 98. • Therefore, the residual value guarantee amount of 98 falls to be taken into account in three ways as follows: o as part of Company A’s initial qualifying expenditure under section 70C, CAA 2001; o when paid, as reducing the disposal value computed under section 70E, CAA 2001; and o when paid, as qualifying expenditure under the normal capital allowance rules in section 11, CAA 2001 upon reacquisition of the ownership of the plant or machinery. The consequence if these contentions are correct is that the put option payment enables Company A to retain virtually all of the capital allowances for its expenditure of 100, whilst claiming allowances a second time for that payment on regaining ownership of the asset. 10
2.2.5 What is the GAAR analysis under clause 2(2)? 2.2.5.1 Are the substantive results of the arrangements consistent with any principles on which the relevant tax provisions are based (whether express or implied) and the policy objectives of those provisions? The purpose of the long funding lease regime is to provide equality of tax treatment between a leasing transaction which essentially amounts to a funding transaction and a transaction involving acquisition of plant or machinery using actual loan finance (see extract from the Explanatory Notes to Clause 81 and Schedule 8 to Finance (No 2) Bill 2006, in the Annex). The principles upon which the long funding lease regime legislation is based are the same as for capital allowances generally. In other words the net amount of relief available should be equal to the net expenditure over the relevant period. In the lessee’s case this excludes financing charges and other amounts which are otherwise relieved or not allowable (akin to the financing and other costs of a purchaser). Expenditure is relieved once, and once only. In this context it is reasonably apparent that the substantive tax result (double relief for the RVG payment) is not consistent with the underlying principles or policy objectives of the relevant tax provisions. 2.2.5.2 Does the means of achieving the substantive tax results involve one or more contrived or abnormal steps? The lease from Company B is of an unusually short duration for the type of plant or machinery involved. The lease does not provide finance of any substance for the selling company which continues to have full use of the relevant assets throughout. Where Company B is a third party the arrangements, exclusive of tax relief claimed, come at a pre-tax loss for Company A because of the fees required by Company B to enter into the arrangements. The arrangement involves a company that starts with legal ownership of the asset selling it, immediately leasing it back and then almost immediately repurchasing it. There are not, in any of the cases seen by HMRC, any commercial or economic reasons, real or apparent, for selling the plant or machinery, leasing it back for less than a month and then buying it back again. In these circumstances, there is little doubt that the arrangement involves contrived or abnormal steps – the short lease with no apparent commercial purpose. 2.2.5.3 Were the arrangements intended to exploit any shortcomings in the relevant tax provisions? 11
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(2) Companies shall be chargeable t
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Finance Act 1996 Section 91B: Non-q
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145. Since then, these proposals ha
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(a) given by or on behalf of any on
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(b) paid after the withholding from
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Case 1 This case applies if the tru
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those profits by the Island but onl
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