Corporation Tax Act 2010 section 938G

Tax capacity assumption

Section 938G sets out the assumptions about each company's tax capacity that must be applied when determining whether a group mismatch scheme will, or might, secure a relevant tax advantage.

• When assessing whether a scheme produces a tax advantage, economic profits and losses across the scheme group must be calculated assuming every company that is a party to the scheme can fully utilise its losses and is fully taxed on its profits from loan relationships and derivative contracts.
• The "full tax benefit" of a loss is the corporation tax reduction that would arise if the loss were recognised as a debit (or reduction in a credit) and the company had sufficient profits — equal to the amount of that debit or credit reduction — against which to set it.
• The "full tax cost" of a profit is the corporation tax increase that would arise if the profit were recognised as a credit (or reduction in a debit) and the company had no other profits chargeable to corporation tax.
• This assumption ensures that any identified tax advantage stems from a genuine structural mismatch in tax treatment, rather than from incidental factors such as existing losses that happen to shelter profits from loan relationships or derivative contracts.