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Examples of schemes to avoid CT on interest

This guidance applies to companies that hold shares up to 21 April 2009

»Ê¹ÚÌåÓýapp following two examples show in outline how companies could structure arrangements to generate an interest-like return which for tax purposes does not arise as interest.

Scheme 1: shares subject to third party obligations

• On day 1, a UK special purpose vehicle (SPV) company issues 100m £1 ordinary shares to a bank but only 0.001p/share is actually paid up (i.e. £10k in total). Under the terms of the share issue, the bank is obliged to pay up the balance of the capital (£100m less £10k) in one year’s time, even if it sells the shares in the meantime.
• On the same day, the bank sells the shares to UK plc (avoider) for their net present value of (say) £95m. At the end of the year, bank pays up the remaining £100m of share capital, so that the value of the SPV shares is then £100m, being the cash it has.
• »Ê¹ÚÌåÓýapp economic effect is that the bank receives £95m from UK plc on day 1, and pays £100m to SPV (owned by UK plc) on day 365. »Ê¹ÚÌåÓýapp figures will be such that the £5m difference represents a year’s interest on the initial £95m cash paid by UK plc.
• »Ê¹ÚÌåÓýapp substance is that UK plc has invested £95m for a year and has received £5m of interest, and it is likely that this arrangement will be accounted for as a loan and the profit of £5m shown as interest income.
• For CT purposes, the only charge would be on a capital gain of £5m (subject to indexation) if UK plc disposes of the shares. It would usually be the case that UK plc would have capital losses to cover the gain.

Scheme 2: other interest-like shares

• In this scheme, a UK SPV is set up with share capital of £95m and it uses that cash to acquire a debt of £100m due in a year’s time. £95m is the present value of the debt. This is most likely to have been a structured debt set up for the purposes of the scheme (and to avoid problems with the debt going bad).
• »Ê¹ÚÌåÓýapp shares are then sold to UK plc for £95m. UK plc knows the company will be worth £100m in a year’s time.
• »Ê¹ÚÌåÓýapp substance is exactly the same as scheme 1 in that UK plc would earn a fixed profit of £5m in the form of an unrealised capital gain, it is only the mechanism which delivers the pre-ordained increase in value of the SPV’s shares that differs.