Enter Your E-mail

HMRC have published guidance on the anti-avoidance measures contained in Finance Act 2007, s 28 in relation to management expenses.

Under ICTA 1988, s 75, a deduction is allowed where a company has incurred expenses in managing its investment business.

This legislation was introduced in 1915 and remained largely unchanged until 2004 when changes were made to reflect a more modern business climate. Those changes included, amongst other things, an unallowable purpose rule.

Since the 2004 changes, various attempts have been made to circumvent the unallowable purpose rule and/or to create contrived expenses that could be deducted as expenses of management under ICTA 1988, s 75.

HMRC do not consider that these schemes succeed but their use has shown that the unallowable purpose rule is not a sufficient deterrent. Finance Act 2007, s. 28, which received Royal Assent on 19th July 2007, therefore introduces a targeted antiavoidance rule (TAAR) for management expenses. It also amends the existing unallowable purpose rule, so that similar provisions apply to both the purpose for which investments are held and the purpose for which management expenses are incurred. Both new provisions apply to expenses of management paid on or after 20 June 2007, the date the measure was announced.

The new TAAR will apply where the main purpose or one of the main purposes of arrangements is to seek to produce a wholly or partly contrived deduction for management expenses or other tax advantage. It is based upon the principle that relief for expenses of management should only be available where a company has genuinely incurred expenditure in the course of managing its investment business. Where the rule applies, its effect is to disallow relief for expenses of management where companies enter into arrangements where tax avoidance is the main purpose or one of the main purposes of the arrangements.

The provisions are unlikely to affect the vast majority of companies, only those which have deliberately and knowingly entered into a scheme to avoid tax.

The HMRC Company Tax Manual will be amended to reflect the changes to the legislation and to describe the new provisions in more detail.

Link

Guidance on the New Management Expenses Anti-Avoidance Provision