Hybrid and other mismatches: Exemptions for regulatory capital
Published 30 October 2019
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Who is likely to be affected
Banks and insurers who issue hybrid capital instruments to overseas associates.
General description of the measure
These regulations exempt certain hybrid capital and debt instruments issued by banks and insurers to their overseas associates from counteraction under the hybrids legislation.
Policy Objective
Interest paid on hybrid instruments issued by banks and insurers to meet regulatory requirements should be deductible.
Background to measure
The hybrid and other mismatches legislation is an anti-avoidance regime that seeks to counteract mismatches in the tax treatment of instruments and structures across jurisdictions. Broadly, where payments give rise to deductions without a corresponding taxable receipt, the hybrid and other mismatches legislation will apply to either deny the deduction or bring the receipt into charge. However, banks and insurers issue hybrid regulatory capital instruments that include some features which may mean there is a mismatch in tax treatment across jurisdictions. It is not intended that these should be counteracted by the hybrid and other mismatch rules, as this would override the general policy objective that interest paid on regulatory capital instruments should be deductible.
The tax treatment of hybrid capital instruments issued by banks and insurers was set out in the Taxation of Regulatory Capital Securities Regulations 2013, which were amended in 2015 (the RCS Regulations). The RCS Regulations ensured that interest on regulatory capital instruments was deductible for tax purposes. The hybrid and other mismatches legislation included an exemption for financial instruments covered by the RCS Regulations thereby preserving the interest deductibility for payments arising from such instruments.
In June 2018, the Bank of England finalised its approach to setting a minimum requirement for own funds and eligible liabilities (MREL) that banks need to maintain. To meet these requirements banks are permitted to issue additional types of hybrid capital instruments that were not covered by the RCS Regulations. HMRC took this opportunity to review the treatment of hybrid capital instruments across all sectors to ensure that, subject to certain conditions, interest payments on all debt-like hybrid regulatory capital instruments are deductible, thus removing tax uncertainty.
As a result of that review, in the Finance Act 2019, the RCS Regulations were revoked with effect from 1 January 2019 and replaced with new tax rules for hybrid capital instruments.
Detailed proposal
Operative date
The measure will have effect from 1 January 2019.
Current law
Section 259N(3)(b) of the Taxation of (International and Other Provisions) Act 2010 previously provided an exemption for financial instruments that were regulatory capital securities for the purpose of the RCS Regulations.
Section 19(4) of the Finance Act 2019 replaced section 259N(3)(b) of the Taxation of (International and Other Provisions) Act 2010 with a new power for the Treasury to make exemptions in secondary legislation. Paragraph 1 of Schedule 20 to the Finance Act 2019 revoked the RCS Regulations with effect from 1 January 2019. Section 19(9) of the Finance Act 2019 maintained the existing exemption until new regulations come into force.
Proposed revisions
The Hybrid and Other Mismatches (Financial Instrument: Exclusions) Regulations 2019 provide a new exemption that mirrors the scope of the previous exemption in Section 259N(3)(b) Taxation of (International and Other Provisions) Act 2010 and also exempts certain other financial instruments that count towards a bank’s MREL.
Summary of impacts
Exchequer impact (£million)
| 2018 to 2019 | 2019 to 2020 | 2020 to 2021 | 2021 to 2022 | 2022 to 2023 | 2023 to 2024 |
|---|---|---|---|---|---|
| nil | nil | nil | nil | nil | nil |
This measure is not expected to have an Exchequer impact.
Economic impact
This measure is not expected to have any significant economic impacts.
Impact on individuals, households and families
This measure is expected to have a negligible business administration impact on a small number of banks and insurers. One-off costs for these businesses will include familiarisation with the new rules. There are not expected to be any ongoing costs. This measure is not expected to impact on civil society organisations.
Equalities impacts
We do not anticipate that there will be impacts on groups sharing protected characteristics.
Impact on business including civil society organisations
This measure is expected to have a negligible business administration impact on a small number of banks and insurers. One-off costs for these businesses will include familiarisation with the new rules. There are not expected to be any ongoing costs. This measure is not expected to impact on civil society organisations.
Operational impact (£million) (HMRC or other)
There are no financial consequences for HMRC.
Other impacts
There is no impact on climate and fuel poverty targets or air quality targets. Other impacts have been considered and none have been identified.
Monitoring and evaluation
The measure will be monitored through communications with affected taxpayer groups.
Declaration
Jesse Norman MP, Financial Secretary to the Treasury, has read this tax information and impact note and is satisfied that, given the available evidence, it represents a reasonable view of the likely costs, benefits and impacts of the measure.