Winter2013


context of debt restructurings where tax neutrality may be key. Our preference would be to keep the current rules, and make only


minimal changes to them


where necessary (e.g. to align with changes in the accounting definition).


• In relation to the proposals regarding intra-group transfers in Chapter 8, we support retaining the ability for loan relationships and derivative contracts to be transferred tax free within a group. The rule provides flexibility, especially in the context of debt restructurings and intra- group reorganisations of debt prior to company disposals. We are not persuaded of the need to make radical changes to the current rules.


• Regarding the degrouping charge where a transferee leaves the group after a loan relationship/derivative contract has been transferred to it, we would advocate the introduction of a rule equivalent to s.179(3A) TCGA 1992 such that the charge would not arise to the transferee, but would instead increase the consideration


deemed to


10 of the consultation document). As a matter of principle, we believe that the loan relationship rules and derivative contract rules should aim to tax or relieve the whole of the return on a foreign currency loan or currency derivative. A company looking to lend may have a choice of currency.


be


received by the transferee’s parent on its sale of the shares in the transferee. The charge could thus be exempted by the substantial shareholdings exemption, in the same way as the CGT degrouping charge can now be, following the introduction of s.179(3A) TCGA. This would align the treatment of degrouping charges in the loan relationship/derivative contract rules with that for capital assets; and we do not see the justification for the charges not to be aligned in this way (moreover we believe the same should also apply to the degrouping charge in the intangible fixed assets code).


• We do not believe that only taxing forex movements in respect of instruments held for trading or property business purposes would be the correct approach and, for reasons stated below, think that it might distort behaviour (Chapter


• In relation to the debt restructuring proposals in Chapter 11 of the consultation document, we strongly oppose the proposal to remodel the exemption in CTA 2009 section 322(4) to link it to the insolvency conditions in section 361A. We support that proposal to provide an exemption for corporate restructurings generally (not just where there is an issue of shares) but we do not think such an exemption should be linked to the section 361A insolvency conditions. We doubt the proposal for an explicit arm’s length requirement would provide additional protection against abuse and such a requirement is likely to lead to uncertainty and an increase in the number of clearance requests HMRC receives. We understand that HMRC’s view is that there must be a good policy reason not to link the debt/equity swap rules to the rescue conditions. Our understanding of the consultation is that it is driven by simplification, anti-avoidance and forthcoming accounting changes. Although we acknowledge there will be accounting changes in this area, we see this proposal as a policy change outside that remit and suggest that the law here should remain unchanged. For debt for equity swaps we see no compelling policy reason for change. Indeed, we believe that it is very important from a policy perspective that companies in financial difficulty should have a lot of flexibility to be able restructure debts which have become unsustainable.


• In relation to hybrid instruments (Chapter 11), as a point of principle, it seems correct that a


holder of a convertible or share- linked instrument should be taxed on a similar basis as would have been the case had the investment been in the underlying shares, that is on a chargeable gains basis. Where there is a significant difference between the tax treatment of physical and synthetic investments in assets such as shares then this inevitably leads to choices in relation to the form of an investment being made on the basis of tax as opposed to commercial considerations. One of the policy objectives in the consultation document is “to remove the scope for arbitrage and avoidance”; it seems to us that a choice between receiving income or capital treatment based on form rather than substance is bound to increase the potential for arbitrage (and perhaps avoidance).


• On anti-avoidance measures (Chapter 14), we accept, particularly in view of the fact that the corporate debt/derivatives regime is based on profit or loss for accounting purposes (and, inevitably, therefore, will not always produce the profit or loss at which tax policy is aimed), that an anti- avoidance rule is a legitimate tool to ensure that avoidance activity does not produce a profit or loss which is contrary to the statutory purpose or policy objectives of the corporate debt/derivatives regime. In our view, the GAAR should perform that role. In summary, therefore, we do not see any need for a regime TAAR but, if it is a fait accompli, we see difficulties in adopting such a TAAR if it does not include the requirement that the tax advantage must be contrary to the statutory purpose or policy objectives of the corporate debt/derivatives regime. These difficulties can be addressed by including such a requirement.


A copy of the full response is on the CLLS website.


Bradley Phillips, Chairman, Herbert Smith Freehills LLP


City Solicitor • Issue 84 • 5


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