INTM551080 - Hybrids: financial instruments (Chapter 3): conditions to be satisfied: condition A

Condition A of s259CA TIOPA 2010 requires a payment or quasi-payment to be made under, or in connection with, a financial instrument.

Financial instrument

A financial instrument is defined at s259N, see INTM551020. It is likely that where the definition of financial instrument is satisfied by one party to the agreement, it will also be satisfied for the counterparty. However, this is not always the case and it may be that this condition is only satisfied in respect of one of the parties to the transaction, see the example at INTM551370.

Payment or quasi-payment

A payment is any transfer of money or money’s worth in relation to which an allowable deduction arises in calculating the taxable profits of the payer, if Part 6A (or a non-UK equivalent of Part 6A) did not apply.

As the relationship of the payment to the financial instrument is merely that it be made under or in connection with it, this will include payments to either alter the terms of the instrument (see INTM551290 for an example of where a payment is made to reduce the interest rate due, or INTM551350 where a payment is made to cancel a loan) or allow the release from all or some of its terms (see the example at INTM551300).

An amount is a quasi-payment if

  • an allowable deduction would arise in calculating the taxable profits of the payer, if Part 6A (or a non-UK equivalent of Part 6A) did not apply, and
  • the circumstances giving rise to the deduction may reasonably be expected to result in ordinary income of one or more persons if certain assumptions were to apply

Relevant assumptions

The relevant assumptions are

  • if there is any question of whether an entity is separate from the payer, that is to be determined by the law of the payer jurisdiction, (this will address situations where the payee jurisdiction does not recognise the payee as a separate entity, for example, where it is the permanent establishment of a head office)
  • any payee or potential payee is assumed to have adopted the same accounting approach to those circumstances as the payer
  • any payee or potential payee is assumed to be resident for tax purposes in the payer jurisdiction, and
  • any payee or potential payee is assumed to be carrying on a business in the payer jurisdiction and the circumstances giving rise to the payer’s deduction arise in connection with that business

See INTM551260 for an example of how the relevant assumptions are applied.

Payer, payer jurisdiction and payee

The payer is the person who makes the transfer.

The payer jurisdiction is the jurisdiction in which the deduction is available for tax purposes.

A payee is any person to whom:

  • a transfer of money or money’s worth is made, or
  • an amount of ordinary income arises