Examples of how the GAAR applies to tax arrangements

The effect of the scheme is therefore that Company A obtains a deduction for
the whole of the interest on a paid basis (assuming it is paid after 12 months).
Moreover it does not have to account for the withholding tax that would apply
if in fact all of the interest were paid to X co .
6.2.5 What is the GAAR analysis under clause 2(2)?
6.2.5.1 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 late paid interest rules are intended to act as anti-avoidance provisions
which defer deductions for interest where a connected company creditor is
resident in a NQT. The claimed tax result is consistent with this purpose.
6.2.5.2 Does the means of achieving the substantive tax results involve one or
more contrived or abnormal steps?
The assignment of a small part of the interest in order to trigger the late paid
interest rules is considered to be a contrived or abnormal step, in that it
separates part of the right to interest from the loan creditor to a third party.
Moreover the transaction has no other purposes than to secure a desired
fiscal result.
6.2.5.3 Are the arrangements intended to exploit any shortcomings in the
relevant tax provisions?
It is difficult to see the arrangement as one that exploits shortcomings of the
legislation. Rather, the legislation deliberately withdraws the accruals basis
for interest where any of the interest is paid to a resident of a NQT. That
effect of the legislation in relation to the transaction could not reasonably be
regarded as a shortcoming – rather, that is its express object.
6.2.5.4 Does the arrangement include any of the indicators of abusiveness
within clause 2(4) of the draft GAAR?
None of the indicators of abusiveness is present. The company obtains relief
for an amount that corresponds to a true economic cost.
6.2.5.5 Do the tax arrangements accord with established practice and has
HMRC indicated its acceptance of that practice?
HMRC has in the past indicated its acceptance of similar arrangements. Its
current guidance states:
“CFM35965: Arrangements to come within the late interest rule
In some instances groups have entered into arrangements such that a
company that is party to a debtor loan relationship comes within the late
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