Avoidance scheme fails

Main purpose of a loan relationship arrangement was to avoid tax

The taxpayers took part in a tax avoidance scheme that was notified to HMRC under the disclosure of tax avoidance schemes rules in FA 2004 Part 7. In essence the scheme involved bringing a holding of a subsidiary’s shares within the loan relationship rules by entering into a derivative contract called a “total return swap”. It then depressed the value of the shares by novating a large loan liability into the subsidiary from another group company.

The aim was to accrue a large loan relationship debit in the shareholding company by reference to the reduction in the fair value of the shares in its subsidiary. As a result the subsidiary company also accrued conventional loan relationship debits because of its liability to interest on the loans novated to it.

HMRC disallowed the large debit in the...