Modernising the taxation of corporate debt and derivative contracts 6 June 2013

Transcription

1 Modernising the taxation of corporate debt and derivative contracts 6 June 2013 Grant Thornton UK LLP (Grant Thornton) has considered the proposals set out in the consultation document on modernising the taxation of corporate debt and derivative contracts, which was published on 6 June 2013, and welcomes the opportunity to respond. Grant Thornton's response The proposed measures, as set out in the consultation document, will impact a significant number of Grant Thornton's clients, across a variety of different sectors and industries. While responses to the specific questions raised in the consultation document are included where appropriate, our response largely focuses on our primary concerns over the proposals. In particular, while we acknowledge the desire to introduce legislation to simplify the current rules and counteract certain abusive practices, our view is that the current legislative approach should not be abandoned in favour of complete change, but rather those parts of the legislation which cause problems, either through definition or structure, should be amended. One such area requiring significant attention is, in our view, the loan relationship rules for corporate partners and partnerships. A second area is the definition of loan relationship and that the scope of the legislation should be amended following the case of MJP Media Services Ltd v Commissioners for her Majesty's Revenue and Customs [2012] EWCA Civ 1558 and the issues which it has introduced. In particular, including intercompany debt arising from the settlement of debt to a third party by one group company on behalf of another. Certainty on how to turn a debt into a loan relationship and the documentation requirement would be very helpful. We are aware that some companies and advisers currently take a very relaxed view, while others are spending large amounts of money on legal fees and creating complicated documentation. It may be worth noting that Julian Ghosh QC's guidance on s303(3) Corporation Tax Act 2009 (CTA 2009) in "The Taxation of Corporate Debt" runs to some six pages. Many problems occur in relation to corporate rescue scenarios and it appears from the consultation document that HM Revenue and Customs (HMRC) appreciates this. Many of these issues arose after HMRC published guidance in relation to debt for equity swaps. Rather than change this guidance and make wholesale changes to s322 CTA 2009, it would appear sensible to carve such rescue situations out of the charge to tax. Another major concern is the proposed timing for the introduction of the changes. As currently envisaged the rules will be changed by FA 2015, just after most companies have had to transition to FRS102 (or in some cases FRS101) and will have had to deal with the tax consequences of that transition under the existing legislation. This again is a reason to make only necessary rather than wholesale changes to the regime. Transitional issues are very real and present problems for companies' planning. For example a company entering into an interest rate swap for cash flow hedging purposes may conclude that tax will continue as at present, but then find that is not the case if certain proposals within the consultation document are implemented.

2 Responses to the specific questions set Our responses to the questions asked in the consultation document are set out below. Please note that we have not answered every question. Unless otherwise stated, statutory references are to CTA Chapter 2 Introduction Q2.1 Do you think the timetable proposed in paragraphs 2.14 to 2.18 is practicable? If not, how could it be adjusted? Our major concern with the timetable is not whether it is achievable for HMRC, which we believe it is, but rather the interaction with the timetable for the accounting changes. Unless the Finance Act 2015 changes are to be retrospective and introduced with effect from 1 January 2015, December year end companies will suffer two sets of transitional adjustments in quick succession, firstly to the current tax rules in respect of their accounting changes and then secondly from the current tax rules to the new tax rules. Chapter 3 The Framework Q3.1 Do you think the approach outlined in Chapter 3 would provide a secure basis for determining the existence of matters within the scope of the regime and the taxable amounts? In outline, the proposals appear acceptable and what is already done in many cases. The key will be to ensure that the legislation is clear and achieves those objectives. What is not acceptable is unclear legislation which is supplemented by HMRC guidance and a situation where the guidance becomes critical in applying the legislation. Q3.3 Would a requirement to the effect that amounts brought into account should represent the full amount of the profits, losses and gains from a loan relationship be adequate, or would any further qualification of, or addition to, those words be useful? (see paragraph 3.23)? "Full amount of", would, in our opinion, require definition. The use of the words "gross, without any reduction or offset", may be better. Q3.4 Would it be helpful to make the categories set out in Figure 3 explicit in legislation? Yes, the categories should be set out in legislation, but more important is the legislation for when the adjustments in each category are to apply and the specific circumstances for each category. Chapter 4 Looking behind the accounts Q4.1 Do you agree with the rule proposed in paragraph 4.21 concerning the identification and measurement of amounts to be taken into account? We have no issue with the proposed rule and agree that in situations such as the recent case of Fidex Limited [2013] UKFTT 212 (TC), it appears perfectly reasonable; just the need for clarity on when it applies and how the taxable amount is calculated. Q4.2 In what circumstances should such a rule apply? The biggest risks to the Exchequer probably arise from the biggest companies as they have the biggest numbers, so a company size criteria may be one approach to consider. Q4.3 Do you anticipate any particular difficulties with the rule proposed in paragraph 4.21? If so, how might they be addressed? Our first concern is with the suggestion that the rule only applies where there is a material difference with the economic profit. Material would need to be defined.

3 Secondly, this will lead to additional compliance because calculations will need to be undertaken to determine whether a material difference exists, even where the result is that one does not exist. Q4.4 Are there specific circumstances (other than when there is no material impact on tax outcomes) in which such a rule should not apply? If so, what alternative approach could be taken in such cases? We consider that the rule should not apply where it is clearly inequitable. An example is connected party debt where interest income arises, which is not expected to be received. In this case, the interest income would be taxable, but no relief available for the impairment. Chapter 5 Accounting issues Q5.1 Would you support the proposed "follow the profit and loss" approach set out in paragraphs 5.12 to 5.15? Yes, in respect of not taxing amounts taken to reserves. While in theory, amounts taken to reserves are also currently taxable, in many cases such amounts are already excluded, either for FX amounts or cash flow hedges. However, not all amounts taken to profit and loss should be taxed, particularly those items which are then adjusted below the line (we have set this out in more detail in the following paragraphs). Also, in respect of hedges which are not designated for accounting purposes. A problem arises where mixed consideration is provided. It is considered that for accounting purposes, it is necessary to differentiate between the various forms of consideration being given to the lender for its existing debt. So consider part of the debt being repaid and the remainder being capitalised. To the extent that the consideration being given is lower than the carrying amount of the debt, the difference will be included in the profit and loss account under FRS 4, in respect of that portion of the debt which is settled via cash. In respect of the portion of the carrying amount of the debt which is settled via the issue of equity, no gain or loss will be included in profit or loss and will lead to an entry direct to share capital and premium as a debt for equity exchange. In calculating those entries, the carrying amount of the debt which is allocated to the respective portions would be based on a proportional allocation based on accounting substance under FRS 5 rather than legal form. As a result, the accounts will show a credit to the profit and loss statement equivalent to the gain arising on the cash elements of the consideration being given to the lender, and the balance of the old debt going to share capital/premium. A further step is then required to properly reflect the legal form of the transaction being entered into. The credit posted to the profit and loss statement in respect of the gain arising on the cash elements of the transaction will be transferred from profit and loss reserves to share premium on the basis that this is simply an accounting gain and does not represent distributable reserves based on the legal transaction undertaken. Notwithstanding the accounting analysis being applied, the legal form of the transaction remains that shares forming part of the ordinary share capital of the company are being given in consideration for the release of the debt and therefore Condition B of s322 is satisfied such that the company is not required to bring into account a credit for taxation purposes. On this basis, the credit posted to the profit and loss and subsequently moved to share premium should not be taxable on the company, however this is far from clear in the legislation.

4 Q5.2 Do you anticipate difficulties with a "follow the profit and loss" approach? If so, how might they be addressed? Exclusions need to be clearly set out. Unrealised profits being one such area. Q5.3 Would you support the proposal to simplify the changes of accounting policy rules so that they are based on tax adjusted carrying value in all cases (see paragraphs 5.17 to 5.21)? No. Since, there is a fundamental difference between amounts posted to profit and loss reserves and other reserves and they need to be treated differently. HMRC should review the 10 year spreading rule. If spreading is required, it should be based on the expected life of the instrument involved. Chapter 6 A unified regime for loan relationships and derivative contracts? Q6.1 What benefits and difficulties would you anticipate from combining the loan relationships and derivative contracts codes into a single body of legislations with shared machinery provisions? Advisers, HMRC and taxpayers would need to start from scratch again in understanding how the legislation fits together and works. We do not see how this would ensure a more coherent and robust system and could indeed introduce new planning opportunities and lack of understanding. Q6.3 Overall, would you support such a change? No. We struggle to see that significant benefits would be derived from the change. Chapter 7 Connected party debt Q7.1 Which of the options outlined above do you prefer, and why? We have a strong preference for retaining the current approach to connected party debt, as proposed under option 1, for a number of reasons. In corporate rescue situations, it is frequently necessary to clean up existing connected party debt to facilitate the rescue. For example, a purchaser of a distressed business who only wishes to rescue a part of a distressed group (perhaps excluding a debt laden parent company) will usually require that intercompany debts with those parts of the group that are not to be acquired should be eliminated prior to acquisition. This could also arise where guarantees given by group companies have been called and settled, such that the resultant intercompany debts need to be tidied up. It may also be necessary to clean up intercompany balances wholly within the target sub-group prior to sale If such releases were to trigger a tax charge in the target or the residual group (as proposed under option 2), there is likely to be a direct impact on the pricing of the transaction and the rescue may no longer be commercially viable. In either scenario this would provide a lower return to creditors than would have been achievable if the current rules for connected party debt remain in place and may also make the difference between a successful rescue and the termination of the business with the consequential redundancies. While it would still be possible to clean up connected party debts under one of the insolvency scenarios envisaged in condition C of s322 or conditions A to E of s359 (assuming these provisions are retained) this would also be likely to impact upon prices that can be achieved on the sale of any assets/businesses to third parties or value that can be extracted for creditors in the wider rescue plan. This is because of the taint of insolvency on the business being sold or the prices that can be achieved in a "fire sale". As a result, the return to creditors is likely to be reduced notwithstanding there is no tax charge on the release.

5 It is also frequently necessary to clean up existing connected party debt prior to a sale in circumstances where the company being sold is not practically in distress. For example, where a company has been created within a group and debt funded to build up a new business stream. The new business may be successful or at least not in distress, but the sale proceeds are nevertheless lower than the existing debt. It may also be necessary to clean up intercompany balances wholly within a target sub-group prior to sale. Under option 2, if such releases were to trigger a tax charge in the target, there is again likely to be a direct impact on pricing. Alternatively, the connected parties may seek to trigger an event (for example calling the balance of the debt) to trigger one of the insolvency scenarios envisaged in condition C of s322 or conditions A to E of s359 (assuming these provisions are retained) with the inherent administrative burden of agreeing the position with HMRC, and having to explain the position to purchasers / risk a similar impact on purchase price. Finally, groups are currently able to solvently liquidate unwanted dormant companies provided that the directors are able to swear a declaration of solvency. Often, the dormant company's only remaining assets or liabilities on its balance sheet may be historical intercompany balances that will not be settled. Provided the company is solvent, these balances can be eliminated and the company wound up. However, absent the exemption in s358, the release of intercompany debts would trigger tax liabilities that may push a company into an insolvent position and prevent it from being wound up other than through a more expensive insolvent liquidation. Q7.2 Do you anticipate difficulties with Option 2 set out at paragraph 7.12 to 7.14 and, if so, how might they be addressed? The proposal to exempt connected party debt impairments but tax connected party debt releases appears to conflict with HMRC's stated objective of aligning the tax treatment with accounting treatment. It also seems to us to introduce greater complexity, greater risk of abuse (as noted in paragraph 7.14 of the consultation document) and may prevent groups from undertaking disposals of parts of their group, whether through distressed sale or otherwise. We do not consider this to be a workable solution, particularly in a distressed context. By taxing and relieving connected company debt releases, there is a risk that losses triggered on the release of the debt may become trapped in the creditor company. For example, if the debtor has current year losses sufficient to shelter the credit arising on the release, then the debit arising in the creditor company upon release would be carried forward if it has no other sources of income itself or elsewhere within the group. Without a future source of income in that company, the losses may become trapped. Therefore, this would unfairly penalise groups that have structured debts through intermediate holding companies, which is a common, commercially motivated, scenario. Should such rules be implemented, it is also likely that future connected party funding would, in many cases, simply switch to equity funding to mitigate the risk of tax charges on a future debt waiver. As such, there would be no direct benefit in tax terms to HMRC, but the flexibility to fund connected parties in the most commercially appropriate manner would be impaired. Notwithstanding the above comments, if option 2 were to be pursued, we consider that it would be imperative to introduce a corporate rescue exemption for connected party debts that is aligned with the exemption considered in Chapter 11 (see further below). Q7.3 Which of the approaches set out in paragraph 7.14 would be preferable? As noted above, we do not consider that option 2 is a workable solution. If it is considered that debt releases should be taxable/relievable, then this should apply in all scenarios. It is a commercial matter as to whether a debt can or should be released and so the tax law should not seek to override this. We can also envisage the risk of potential discrimination if the creditor company is in the EU.

6 Q7.4 Are there other relevant issues which are not addressed in this chapter and, if so, how would you address them? A specific question has not been included regarding the proposal in 7.17 of the consultation document to change the late interest rules. Were interest deductions to be aligned with normal principals this could penalise and disincentivise many normal commercial transactions. For example, a substantial proportion of entirely normal acquisitions are effected by newco entities funded by connected party debt. Were interest on such debt to be deductible on an accruals basis but not capable of group relief (typically to the acquired target company) due to profitability levels, the losses would again become trapped. This could necessitate companies looking at remedial measures such as group reorganisations to align trading profits and debt interest into one company to put them back into the same place they are currently. Such measures would bring no additional tax benefit, but would have material time, cost and practical implications, including additional administrative burdens for HMRC in reviewing relevant reorganisation clearances and the efficacy of numerous areas of tax law where such reorganisations are structured to be tax neutral. Chapter 8 Intra-group transfers (group continuity) Q8.1 What is your preferred approach, and why? Option 1 is our preferred approach. As noted above in relation to connected party debt, the existing regime should be retained to ensure that, in corporate rescue scenarios, existing connected party debt can be restructured without crystallising a tax charge. The other options are asymmetrical in the favour of HMRC; as stated in the consultation document HMRC would want to limit the situations in which a tax loss could arise on restructuring, but would be happy to tax a gain. Consideration should be given to whether relevant non-lending relationships should be transferrable within these group continuity provisions. Q8.2 Do you see any difficulties with any of the options set out and, if so, how might they be addressed? Yes, restructuring would be a major problem with the exception of option 1. Q8.3 To what extent does ensuring tax neutrality on intra-group transfers of loan relationships and derivative contracts remain an important commercial consideration? This is an important consideration and fundamental to restructuring to facilitate M&A activity and corporate rescues. Chapter 9 Partnerships and transparent entities Q9.1 Which of the options above would you prefer, and why? Option 2 is our preference. Deeming the corporate partner to be a party to a loan relationship (the appropriate share) would solve some of the key issues which currently exist. Q9.2 Are there particular circumstances where you would see Option 3 as being either appropriate or inappropriate? Taxing unrealised profits is inequitable. Chapter 10 Exchange gains and losses and hedging We see no reason to change the current basis of taxation of foreign exchange movements. Although, the introduction of relief for UK entities lending to overseas group companies in non-sterling currencies would be welcome.

7 The current regime works, and while the disregard regulations are complex, part of that is down to references to old legislation and the piecemeal way in which they were introduced. The disregard regulations should be tidied up and made more user friendly. More flexible election deadlines would help and perhaps such deadlines should only be relaxed for small and medium sized enterprises to assist HMRC's concern around companies taking advantage of retrospective elections. Q10.1 Do you anticipate difficulties with the proposal to tax forex movements only in respect of instruments held for trading or property business purposes? If so, what are they and how might they be addressed? The trading versus non-trading distinction, which is not always clear cut, would be given greater importance in this area. This would be particularly relevant for treasury companies. Q10.2 Do you anticipate particular difficulties with the proposal for the treatment of hedging instruments and, if so, how might they be addressed? Yes, we prefer to see the legislation remain essentially as it is at present. The proposal will lead to the taxation of volatile profits, caused by fair value movements. Companies will not all hedge account. There are two distinct approaches in evidence companies which wish to avoid the taxation on fair value movements and those who wish to simplify compliance. Both of these are available through the existing rules. Q10.3 In view of developments in accounting standards, do you anticipate that companies with hedging relationships will generally be able to opt to apply hedge accounting? We believe that the assumption by HMRC that entities will adopt hedge accounting and keep fair value movements out of the profit and loss account in most cases may prove incorrect, even where they are able to do so. Chapter 11 Debt restructuring Q11.1 Do you anticipate difficulties arising from the proposals in paragraph 11.18? If so, what are they and how might they be addressed? In the context of corporate rescue situations, the fundamental concern we have with option 1 is that it will be necessary to define very tightly what constitutes a corporate rescue and provide extensive and detailed guidance in support of the definition. The definition and guidance would be critical to the efficacy of the proposal. For example, the definition could not simply be along the lines suggested in the consultation document and refer loosely to the debtor being 'at risk of insolvency', nor should it be modelled solely along the lines of s361a in its current form, which only considers whether it is reasonable to assume that one of the insolvency conditions would be met within a certain period. Indeed, it is worth noting that s361a in its current form is rarely used in practice for a number of reasons, including the subjective nature of the test and the impact that it may have upon the value of the business, and so to base the definition of corporate rescue upon this section would be of little practical assistance. As a result, an exemption based on similar principles to s361a would almost certainly lead to clearance being requested on each and every transaction for which the exemption is claimed. This would be contrary to HMRC's stated objectives of reducing the administrative and compliance burden of large numbers of clearance applications. Furthermore, such clearances would be based not on the technical application of the legislation, but rather the commercial rationale for the transaction and the probability of the debtor satisfying one of the 'insolvency conditions' in the future, absent the rescue. It would also run counter to the objective in most rescue scenarios of being able to effect the restructuring in a very short period of time to preserve value and protect jobs. The current exemptions available in s322(4), and in particular condition B do allow rescues to be carried out quickly and with certainty in

8 straightforward scenarios, although we do acknowledge that there remain uncertainties in more complex restructuring that are most likely to require clearance. The existing rules in s322 are generally well understood and accepted by taxpayers. Therefore, our strong preference is to retain s322 in its current form as is proposed under option 2, with all of the existing exemptions within conditions A, B and C. However, we do agree that the introduction of a new condition (condition D) in s322, in conjunction with the existing exemptions, that explicitly relates to corporate rescues could provide greater flexibility and remove some of the existing uncertainties in rescue scenarios. As noted above, 'corporate rescue' would need to be very carefully defined and detailed guidance would be required in relation to how to define and establish where there is a 'risk of insolvency'. This would require further consultation with relevant professionals and insolvency organisations. Such a definition might include a main purpose test together with certain indicators of insolvency, such as a default on banking covenants or an inability to pay debts as they fall due. Even with supplementary guidance, it is expected that there will still be uncertainties and concerns in rescue situations. However, in these scenarios, the parties would still have the option of satisfying one of the other conditions A, B or C or to seek clearance from HMRC that the corporate rescue exemption can be applied. If option 2 is to be pursued along the lines set out above (ie retention of conditions A, B and C, plus the inclusion of a corporate rescue exemption) then we disagree with HMRC's proposal in paragraph to introduce an explicit "arm's length requirement". This appears unnecessary in the context of debt releases with unconnected parties. Such debt releases are by nature only made in a commercial context and so an arm's length override is unnecessary and would introduce further complexity and uncertainty. It would also make the clearances requested more complex, as it would be necessary to obtain clearance that HMRC would not seek to impute this provision in the particular circumstances. The inclusion of a main purpose test within the corporate rescue exemption should address the concerns raised by HMRC. [ As a separate point; in the context of the present law there is a need for clarification on the position where there is a debt/equity swap which results in the former debtor company becoming connected with the former creditor company? It seems that applying the letter of the law, s362 could apply in these circumstances, although we have experience of HMRC accepting that s362 would not be in point. Q11.3 Are there other significant issues in this area not addressed in this chapter? If so, what are they and how might they be addressed? In a corporate rescue context, we would also make the following comments that are not addressed above: Section 322 should specifically provide that a release falling within conditions A, B or C (together with any new corporate rescue exemption) overrides the deemed release provisions in ss361 and 362. For example, confirmation that a debt for equity swap under s322 cannot be caught by the s363a antiavoidance legislation. The existing corporate rescue exemption in s361 should be retained. However, s361a is not generally applied in practice for the reasons noted above, but also due to the on-going commercial problem left by a balance sheet of the debtor company that cannot be rationalised. This section should be amended such that it is based upon a new definition of corporate rescue introduced in s322. References to corporate rescue should then be removed from the definition of "relevant rights" in s358(4). A similar corporate rescue exemption should also be introduced into s362. If the exemption within s358 for connected debt releases were to be removed (as per HMRC's option 2 at paragraph 7.12) then it would be imperative that a new corporate rescue exemption is included within s322 that applies to any releases (whether between connected or unconnected parties).

9 There are situations other than distressed where the availability of a debt for equity swap is desirable. For example, where there is too much debt in a subsidiary owing to its parent and it is desirable to capitalise to make the balance sheet of the subsidiary look better; or where the creditor genuinely wants to become a shareholder. Paragraph 11.1 of the consultation document notes that 'debt restructuring' can involve the issue of new debt on different terms. At present there is little guidance as to what this means in practical terms where there is a variation to the terms of a debtor relationship beyond CFM5603D. Accordingly clearance is often required from HMRC where amendments are sought to existing debt instruments for entirely commercial reasons, but where the guidance is not explicit and where release and re-issue (were that to be the view) would trigger rolled over gains or rolled up interest to become taxable. Specific guidance should be given by HMRC in relation to situations where a lender is subject to a debt for equity swap with the intention that the lender will subsequently dispose of those shares to another third party unconnected to the corporate. Chapter 12 Hybrid and special treatment instruments Q12.1 Do you agree with the approach proposed in paragraph in respect of holders of convertible and share-lined instruments? If not, why not, and what alternative could be adopted? Is paragraph worded as intended? It seems reasonable to treat items where the underlying is capital as outside the income regime. Q12.2 Do you agree with the approach proposed in paragraphs to in respect of issuers of convertible and share-linked instruments? If not, why not, and what alternative could be adopted? It is OK to carry on with the same basis as at present. We agree with paragraph Q12.3 Do you anticipate practical or computational difficulties or tax avoidance risks arising from different approaches to the taxation of holders and issuers, as proposed? If so, how could they be addressed? The only issues involve connected parties and such planning has been negated by legislative amendments subject to changes to the connected party rules as a result of this consultation. Q12.4 Are you aware that the property derivative rules are in fact used in any nonavoidance context? The main attraction of property derivative transactions has, in our experience, been by investors seeking exposure to the property market without incurring the often significant costs associated with physical property ownership. In addition, property derivatives are frequently used where direct property ownership may be difficult or impossible due to regulatory or commercial constraints. Q12.5 Do you support the proposal to repeal the property derivative rules? If not, what would be an alternative approach? We consider that the current rules reflect the nature of the commercial transactions where property derivatives are used. While often there will be little or no material difference between the taxable profits calculated under the chargeable gains rules (ss639 to 650), there are a number of instances where statutory reliefs (eg indexation) will no longer be available. This puts taxpayers investing into property derivatives at a disadvantage compared to direct property investors and ultimately results in higher effective taxation for these investors.

10 Also, under the current rules, capital losses can be offset against gains realised on disposals of derivatives. This mirrors the nature of the underlying transaction. Any change or repeal of the current rules should allow for a rebasing of derivatives (at the option of the taxpayer) and future use of losses from past property derivative transactions. Chapter 13 Bond funds and "corporate streaming" Q13.1 Overall, would you support the proposed reform of the bond fund rules in Chapter 3 of Part 6 CTA 2009, and why? We would not support the proposed reform because it is important to maintain the same tax treatment for corporate investors irrespective of whether they invest in a bond fund or the underlying assets themselves. Q13.2 How significant are the risks mentioned in paragraph and how could they be mitigated? We do not believe the risks are significant as we believe the majority of corporate investors base decisions on the commercial aspects of an investment rather than being motivated to achieve an incremental return based on tax efficiency which would be unlikely to be significant. Q13.3 Would the proposed reform of the bond fund rules involve other risks to the Exchequer or to taxpayers? If so, how could they be mitigated? We do not believe that there would be a direct impact. Q13.4 Do you think the anti-avoidance rules proposed in paragraphs to are necessary and appropriate? Is there a better approach to preventing exploitation of bond funds for tax purposes? The distribution channel for investment funds involve multiple parties often making it extremely difficult to operate quantitative ownership tests in anti-avoidance measures. Also because of the open ended nature of funds an individual's ownership level will increase where redemption levels are high. We believe that genuine diversity of ownership test "GDO" already established in SI 2006/964 is a suitable mechanism for targeting anti avoidance. Q13.5 Overall, would you support replacement of the current rules in Part 6 of CTA 2009 as they apply to holdings in offshore funds with rules similar to those in S378A ITTOIA? No, as we believe the current rules are satisfactory in terms of maintaining equivalence of treatment. Q13.7 What would you expect to be the extent of any deferral or loss of tax arising from the rolling up of interest in OFs? We expect that deferral or loss of tax would be minimal. While there will be a deferral of the taxing point where a fund is outside the scope of the offshore fund rules or where the fund is a non reporting fund, a corporate investor will not be able to avail themselves of indexation relief thus counteracting the deferral advantage. Q13.10 Which of the options for the corporate streaming rules would you prefer, and why? We believe the repeal of the corporate streaming rules is not advisable as it undermines the principle of equivalence of tax treatment.

11 Q13.11 Once the main corporation tax rate and the rate applicable to AIFs are aligned, would repeal of the corporate streaming rules have any significant commercial or tax impacts, including impacts on particular sectors? Can you quantify any such impacts? The corporate streaming rules are a vital component of the PAIF regime. Their repeal would impact on current PAIF funds and make a PAIF structure unworkable. Similarly life companies would no longer be able to claim a tax credit on investments made through a fund structure. Chapter 14 Anti-avoidance measures The introduction of a TAAR will inevitably lead to taxpayer uncertainty and the wish to seek clearance from HMRC that transactions will not be subject to the TAAR. Q14.1 Do you see any difficulties in adopting a "regime TAAR" along the lines set out in this chapter? If so, how could they be addressed? A TAAR would remove certainty and make the legislation more woolly. The regime needs more certainty and not less. HMRC guidance could become defacto law. With HMRC having won the recent case of AH Field (Holdings) Limited [2012] UKFTT 104 (TC) and with the introduction of the general anti-abuse rule, does the approach to anti-avoidance need amending? Q14.2 Are there any particular anti-avoidance provisions (other than transfer pricing and unallowable purposes rules, which will be retained) which need to be kept separate from the regime TAAR, and if so, why? As set out in our response to question 14.1, we believe that keeping anti-avoidance legislation separate and targeted leads to greater clarity. Q14.3 Would it be helpful for the legislation, or guidance, to include indicative examples of potential counteractions under the regime TAAR? A white and black list would be helpful, but such lists would require constant updating to remain useful. Q14.5 Will the proposals for the "unallowable purpose" rules impact on commercial transactions where there is no intention to avoid tax? Yes, it will introduce taxpayer uncertainty and may impact commercial decisions. Q14.6 Do you anticipate difficulties generally with the proposals set out in this chapter? If so, how might they be addressed? Yes, as noted above. Chapter 15 Tax impact assessment Q15.1 Subject to detailed policy design and drafting of legislation, would you expect the proposals or options in this document to impact significantly on the amount or timing of tax payable by businesses of which you have experience? If so, how and why? To the extent the proposals introduce timing differences, then the amount of tax would not change. However, our concern is that the proposals will introduce trapped losses into groups. The planning required and associated costs may prevent commercial decisions from being made.

12 Q15.2 What is your evaluation of the cost, to businesses of which you have experience, of complying with the loan relationships and derivative contracts tax rules as they stand? How do you arrive at your conclusion? Changing the whole basis of the legislation will create a massive cost. Businesses and their advisers know the current rules. There is the potential for a very significant initial impact, which happens whenever legislation changes. Conclusion We support the changes set out at the start of our comments, but do not agree that the current regime should be fundamentally re-written.

13 Contacts For any queries in respect of our comments in this document, please contact: Kevin Thorne David Hill Kathryn Hiddleston ( ( ( Grant Thornton UK LLP Grant Thornton House Melton Street Euston Square LONDON NW1 2EP Telephone: Fax: Grant Thornton UK LLP. All rights reserved. Grant Thornton refers to the brand under which the Grant Thornton member firms provide assurance, tax and advisory services to their clients and/or refers to one or more member firms, as the context requires. Grant Thornton UK LLP is a member firm of Grant Thornton International Ltd (GTIL). GTIL and the member firms are not a worldwide partnership. GTIL and each member firm is a separate legal entity. Services are delivered by the member firms. GTIL does not provide services to clients. GTIL and its member firms are not agents of, and do not obligate, one another and are not liable for one another s acts or omissions.