INTM610190 | Exception Conditions: Tax Advantage Test

Paragraph 2(2)(b) Schedule 4 Finance Act 2019 provides that arrangements are excepted from being Profit Fragmentation arrangements if it is not reasonable to conclude that the main purpose, or one of the main purposes, for which the arrangements were entered into was to obtain a tax advantage.

Whether obtaining a tax advantage is the main, or one of the main, purposes, of the arrangements is a question of fact which depends on all the circumstances of the particular case.

Purpose

The main purpose’ and ‘one of the main purposes’ take their ordinary meaning.

A person may have more than one main purpose in entering into a transaction, and determining whether obtaining a tax advantage is one of the main purposes is a wider test than determining whether it is the main purpose.

Arrangements may be structured to achieve a number of objectives, both from a commercial perspective and in terms of tax. If the arrangements are structured so that achieving a tax advantage is at least one of the main purposes, then they will meet the Tax Advantage Test at para 2(2)(b).

This might be the case where arrangements include an additional step, without which the commercial objectives could have been achieved, but not the tax advantage.

A tax advantage purpose test us a wider test than a tax avoidance purpose test. Further guidance on the tax advantage test is given below.

Tax Advantage

The Profit Fragmentation legislation applies in relation to income tax or corporation tax. Tax advantage is a defined term in the Profit Fragmentation legislation and includes:

• relief or increased relief from income tax or corporation tax,

• repayment or increased repayment of income tax or corporation tax,

• avoidance or reduction of a charge or an assessment to income tax or corporation tax,

• avoidance of a possible assessment to income tax or corporation tax,

• deferral of a payment of tax or advancement of a repayment of tax, and

• avoidance of an obligation to deduct or account for tax.

The nature of the adjustments that can be made under this schedule mean that the legislation will only apply to tax advantages that can be counteracted by making just and reasonable adjustments to the expenses, income, profits or losses of the resident party. This will limit the applicability of the legislation in cases where the tax advantage obtained relates to indirect taxes for example.