Tax avoidance – Total Return Swaps
A new measure was announced as part of the 2013 Autumn Statement 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 between group companies using derivatives which 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.
However, there were significant concerns of the potentially wide effect of the measure on normal commercial transactions and revised clauses were published on 23 January 2014 which seek to negate some of these concerns.
HMRC have also published a technical note on the measure highlighting the differences between the old and new draft legislation as well as providing some worked examples of arrangements to which the new legislation will and will not apply.