Section 110 Finance Act 1993

Section 110 Finance Act 1993: A Summary

Section 110 of the Finance Act 1993, often referred to simply as “Section 110 schemes,” was a provision in UK tax law that enabled companies to convert income streams into capital receipts for tax purposes. This had significant implications for corporation tax, allowing companies to effectively reduce their overall tax burden.

The core mechanism of Section 110 involved the creation of a special purpose vehicle (SPV), typically a limited liability partnership. This SPV would acquire income-generating assets, such as leases or royalties, from the originating company. The SPV would then finance this acquisition by issuing debt instruments (often deeply discounted securities) to investors. The repayments to investors were structured to align with the incoming income stream from the acquired assets.

The crucial element was the tax treatment. The sale of the income stream to the SPV was treated as a disposal for capital gains purposes, which often resulted in a lower tax rate than the corporation tax rate applicable to regular income. The SPV, benefiting from certain tax advantages applicable to partnerships, could pass through the income received to the investors while minimizing corporation tax liability. The originating company could then effectively realize a lump sum upfront, rather than receiving the income stream over time, and potentially at a lower effective tax rate.

The popularity of Section 110 schemes grew rapidly due to the significant tax advantages they offered. Companies from various sectors, including property, utilities, and finance, utilized these schemes to optimize their tax positions. However, the perceived abuse of the legislation led to increasing scrutiny from HM Revenue & Customs (HMRC).

HMRC challenged many Section 110 schemes, arguing that they lacked genuine commercial purpose and were primarily motivated by tax avoidance. They focused on arguments that the schemes were artificial and designed solely to circumvent tax laws. These challenges resulted in numerous court cases, with varying outcomes.

Ultimately, recognizing the potential for tax avoidance, the government closed the loophole through subsequent legislation. While Section 110 itself wasn’t directly repealed, its effectiveness was severely curtailed by targeted amendments to tax laws, particularly those relating to securitization and the treatment of SPVs. These changes made it significantly more difficult to structure schemes that could successfully exploit the original provisions of Section 110. The legacy of Section 110 Finance Act 1993 serves as a crucial example of how tax legislation can be exploited and the subsequent need for robust measures to prevent tax avoidance.