CTM08234 | Corporation Tax: management expenses: targeted anti-avoidance rule (TAAR) - purpose

If management expenses or some other tax advantage arises out of a transaction that is part of arrangements, the legislation asks whether the main purpose or one of the main purposes of the arrangements (referred to as ‘a main purpose’ in this guidance) is to create or increase the deduction for management expenses or to achieve another tax advantage.

The purpose of the arrangements is determined by the purpose of the participants in entering into them. If any participant has a main purpose of achieving a deduction (or increased deduction) for management expenses or other tax advantage, that will constitute a main purpose of the arrangements.

All of the evidence regarding the facts and circumstances relating to the arrangements needs to be taken into consideration to determine their purpose, including:

• any overall commercial objective from the perspective of both the individual participants and the wider corporate group - in this context a commercial objective does not include tax motivated reasons;

• whether this objective is one which the parties involved might ordinarily be expected to have, and which is genuinely being sought;

• whether the objective is being fulfilled in a straightforward way - would any particular steps have taken place were it not for tax advantage that could be obtained?

Consideration should also be given to whether, in the absence of the tax considerations:

• the transaction or transactions giving rise to the relief/tax advantage would have taken place at all, and if so

• whether the transaction or transactions would have taken place under the same terms and conditions.

By itself, the existence of a deduction for management expenses or other tax advantage is not enough to show that the arrangements have a main purpose of obtaining a tax advantage. Where the tax advantage is a fortunate consequence of arrangements, not a main purpose for the arrangements, the TAAR will not apply and genuine expenses of management will continue to be eligible for relief.

A company or a group may consider two alternatives to achieve a commercial objective and choose on commercial grounds to pursue one of them. That there was a beneficial difference in tax treatment for the route chosen would not mean that a disallowance automatically arises from the TAAR. Where a choice is available, disallowance under the TAAR will only take effect where securing a deduction for management expenses or other tax advantage was a main purpose of the arrangements.

There may be situations where the beneficial tax treatment secured through pursuing one route rather than another is so large as to indicate that achieving that tax treatment was a main purpose. But this is unlikely where the arrangements chosen do not involve additional, complex or costly steps included so as to secure or enhance the tax treatment.