What does section 564H of the Income Tax Act 2007 do?

Section 564H is an anti-avoidance measure that strips alternative finance arrangements of their favourable tax treatment under sections 564C to 564G. It applies where arrangements between connected persons are not at arm's length and the person receiving the alternative finance return is not subject to UK income tax, corporation tax, or any equivalent overseas tax.

What are the four conditions that must be met for section 564H to apply?

First, the arrangements must otherwise qualify as alternative finance arrangements under sections 564C to 564G. Second, transfer pricing rules under section 147 of TIOPA 2010 must require recomputation of profits on arm's length terms. Third, an affected person must be entitled to the finance return. Fourth, that person must not be liable to UK or equivalent overseas tax on the return.

What is the effect when section 564H applies to alternative finance arrangements?

When all four conditions are satisfied, the arrangements lose their classification as any of the five categories of alternative finance arrangement — purchase and resale, diminishing shared ownership, deposit, profit share agency, and investment bond. The special alternative finance rules cease to apply and the transactions are taxed under general principles instead.

Is there an equivalent corporation tax rule to section 564H ITA 2007?

Yes, an equivalent rule for corporation tax purposes is found in section 508 of the Corporation Tax Act 2009. It operates in a similar fashion to section 564H, ensuring that companies cannot exploit alternative finance arrangements between connected parties that are not at arm's length where the recipient escapes tax.

Income Tax Act 2007 section 564H

Provision not at arm's length: exclusion of arrangements from sections 564C to 564G

Section 564H excludes certain alternative finance arrangements from the favourable tax treatment in sections 564C to 564G where the arrangements are not conducted at arm's length between connected persons and the recipient of the finance return is not subject to UK or equivalent overseas tax.

Arrangements caught by this section lose their status as any of the five types of alternative finance arrangement (purchase and resale, diminishing shared ownership, deposit, profit share agency, and investment bond arrangements).
The section applies where transfer pricing rules under section 147 of TIOPA 2010 require a party's profits and losses to be recalculated on an arm's length basis rather than in accordance with the actual terms of the arrangement.
An affected person under the transfer pricing rules must be entitled to receive the alternative finance return (or an amount representing it) from the arrangements.
That affected person must not be subject to UK income tax, corporation tax, or any equivalent tax in an overseas jurisdiction on the return or the amount representing it.

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