Tax avoidance – Total Return Swaps
A new measure was announced at Budget 2014 to counter arrangements where a company enters into a derivative contract with a parent company or another group company, generally located in a tax haven. The new measure will affect group companies using derivatives that involve a payment of all or part of the profits.
This is known as a Total Return Swap. Under the contract, all of the profits of the company are paid away in return for much smaller payments back. A deduction is claimed for the payment under the contract, leaving little or no profit chargeable to tax.
To fall within the legislation, there are two requirements.
- There must be a transfer of profits, and
- it must have as its main purpose, or one of its main purposes, obtaining a tax advantage.
HMRC has published revised guidance that expands on the guidance published on 19 March 2014, with more details and ten worked examples.