Learn More About the Arm’s Length Principle in the UK and How It Is Used to Protect the Interests of Everyone
The interest in maintaining fairness to a contract has always been ever-present. Whilst it may be easy to draft up documents to officiate an agreement, much emphasis as of recently has been to ensure that every party involved were treated fairly and not exploited by the terms agreed upon. This is where the Arm’s Length Principle came in, and this article will explain the essentials. Learn more about the Arm’s Length Principle in the UK and how it protects everyone’s interests.
What Exactly is the Arm’s Length Principle?
Arm’s Length Principle is a condition that describes parties involved in a transaction are on equal footing and are independent. It is commonly used to contract to ensure that the parties involved are by their volition and under no pressure when consenting to a particular agreement. Apart from that, the principle also serves as a barrier by introducing a third party into the relationship, diminishing the possibility of any undue influence that can compromise the decision-making process. It is also known in its abbreviated form “ALP.” The opposite of this condition is often known as a fiduciary relationship where there is a difference in power and influence. Still, the relationship is guided by mutually agreed-upon parameters.
Applications of Arm’s Length Principle
The Arm’s Length Principle is most notably used in the following instances.
- Avoid Re-classification.
Whenever property is transferred, its classification and taxation scheme vary based on the nature of the transaction. For example, you wish to sell your house to a relative at a below-market rate, this transaction can be classified as a gift and subjected to different regulations and tax calculations. To avoid this, you would want to do this bona fide by involving a third party to independently appraise your house’s value and then sell it to your relative.
- Separation of Bodies.
This is especially so when government bodies are involved. Separation of bodies ensures that agencies with separate jurisdiction do not have power over one another, allowing justice in a system of governance.
- Employee Protection.
The workplace setting often involved dealing with people of different power levels. Sometimes, to prevent unjust firing or biased treatment, the human resource department serves as intermediaries.
This applies to local and foreign transactions. It is more demonstrably evident in countries that are members of the Organization for Economic Co-operation and Development (OECD) that stood together to build better trade policies. Essentially, to establish this condition, an unconnected party is often involved in a particular transaction.
What You Should Know
The following are some details you may find helpful:
Depending on the type of transaction involved, the need for ALPs differs as well as its procedures. When appointing an unaffiliated third party, the party must have the competency in providing a professional opinion or with the relevant skills. This is to ensure that the ALP can be achieved with utmost fairness. ALPs are important, especially when tax is involved. The nature of transactions can determine the way something is taxed. With ALP, there could be potential benefits and incentives that can work to your advantage.