Policy paper

Amendments to the hybrid and other mismatches regime for Corporation Tax

Published 12 November 2020

1. Who is likely to be affected

Multinational groups with UK parent or subsidiary companies involved in cross-border or domestic transactions that produce a mismatch in the tax treatment. The mismatch may be within the UK or between the UK and another jurisdiction.

2. General description of the measure

This measure introduces a number of changes to the hybrid and other mismatches regime. These changes are designed to ensure that the regime operates proportionately and as intended.

3. Policy objective

The hybrids legislation has had effect since 1 January 2017. The regime addresses arrangements that give rise to hybrid mismatch outcomes and generate a tax mismatch, and in doing so fully implements the OECD Base Erosion and Profit Shifting (BEPS) Action 2 recommendations. Mismatches can involve either double deductions for the same expense, or deductions for an expense without any corresponding receipt being taxable.

The changes consist of a series of reforms to the legislation to ensure that it operates proportionately and as intended. These reforms are informed both by HMRC’s experience of applying the rules for three years, and by the fact that other jurisdictions have implemented equivalent rules since 2017. 

4. Background to the measure

At Spring Budget 2020 the government announced that it would hold a public consultation to examine areas of the legislation that may not operate proportionately or effectively. That consultation was carried out between 19 March and 29 August 2020. A summary of responses to the consultation will be published on 12 November 2020.

This measure introduces a number of technical changes to the hybrid and other mismatches regime, which have been identified following this extensive consultation with stakeholders.

5. Detailed proposal

All statutory references below are to Taxation (International and Other Provisions) Act 2010 (TIOPA 2010) unless otherwise stated.

5.1 Operative date

The changes will be retrospective and have effect from 1 January 2017 in respect of those amendments relating to dual inclusion income, acting together 5% rule, securitisation vehicles, investment trusts, relevant debt relief provisions, capital attribution tax adjustment (CATA), the jurisdictional scope of s.259BE and s.259KA(8), US Limited Liability Companies (LLCs) and the definition of foreign tax at s.259B(2).

Changes in respect of acting together 10% rule, tax-exempt investors, transfer pricing rules, illegitimate overseas deductions and imported mismatches will have effect from Royal Assent of the Finance Bill 2021

5.2 Current law

The hybrid and other mismatch regime is contained in Part 6A of TIOPA 2010, and came into force on 1 January 2017.

5.3 Proposed revisions

Legislation will be introduced to make the following changes to the hybrid and other mismatches regime:

• amend the definition of dual inclusion income throughout Part 6A TIOPA 2010 to include income that is fully taxed but not subject to any corresponding deduction in any territory. This treatment will only apply where that outcome would not have arisen but for the hybridity of the UK recipient which gives rise to a counteraction under Part 6A. Section 259ID will be repealed
• amend the definition of acting together at s.259ND(7)(c) to exclude cases where a party has a direct or indirect equity stake in a paying entity no greater than 5%, including votes and economic entitlement
• amend the definition of acting together at s.259ND to exclude any investor holding less than 10% of a partnership that is a collective investment scheme, whilst providing against fragmentation of interests
• amend s.259EB(3)-(4) and s.259GB(3)-(4B) to prevent a counteraction where the recipient is a tax exempt investor akin to a Qualifying Institutional Investor within the substantial shareholding exemption rules (TCGA 1992 sch.7AC, para 30A)
• amend Chapter 11, to the effect that where the payment by the UK entity (the “imported mismatch payment”) is subject to an adjustment under Part 4, the “relevant mismatch” should be computed in all respects as if the amount deemed to be funded by the imported mismatch payment was reduced by an equivalent proportion
• amend s.192 Part 4 TIOPA 2010 to prevent a counteraction under Part 6A being effectively unwound by virtue of a corresponding adjustment in another group company
• amend Part 6A to exempt from counteraction payments to and from entities taxed as securitisation vehicles within the Taxation of Securitisation Regulations (as introduced in 2006 by Chapter 4, Part 3 CTA10 and SI 2006/3296)
• amend Part 6A to clarify that payments of deductible dividends as set out within The Investment Trusts (Dividends)(Optional Treatment as Interest Distributions) Regulations 2009 (SI 2009/2034) are not subject to counteraction under Chapter 3
• amend the definition of ordinary income in s.259BC to clarify that an interest receipt of an investment trust does not cease to be ordinary income by reason of any option by that investment trust to pay deductible dividends
• amend Chapter 3, to ensure that no counteraction will arise in the circumstances contemplated by the “relevant debt relief provisions” set out in s.259CB(3)
• amend Part 6A to clarify that any relief arising from Capital Attribution Tax Adjustments (CATA) will not be subject to counteraction
• amend s.259BE(2), s.259BE(3)(a) and (b) to apply only to the UK or any other relevant territory
• amend s.259GB(4A) to treat US LLCs seen as transparent by all their members in the same manner as partnerships
• amend the carry forward treatment of illegitimate overseas deductions in Chapters 9 and 10 in order to allow relief for the deduction when made to the immediate investor or equivalent in chapter 10. This will be actioned by amending references to the income of any person as to refer only to a person other than the immediate investor or the relevant dual resident or multinational company in the parent jurisdiction
• amend condition E within Chapter 11, s.259KA(7), so it tests whether an overseas regime seen as a whole is equivalent to Part 6A and prevents any counteraction under Chapter 11 if it is.
• repeal condition F within Chapter 11, s.259KA(8) since it tests for factors already tested by Conditions D and G
• amend the definition of foreign tax in s.259B(2) to ensure that income should not be regarded as charged to a foreign tax where that income is deemed to arise to, and be taxed in the hands of, an entity other than that to which it arose

5.4 Summary of impacts

5.5 Exchequer impact (£ million)

2020 to 2021	2021 to 2022	2022 to 2023	2023 to 2024	2024 to 2025	2025 to 2026
nil	nil	nil	nil	nil	nil

This measure is not expected to have an Exchequer impact.

5.6 Economic impact

This measure is not expected to have any significant economic impacts.

5.7 Impact on individuals, households and families

This measure has no impact on individuals or households as it only affects corporate businesses. 

The measure is not expected to impact on family formation, stability or breakdown.

5.8 Equalities impacts

It is not anticipated that there will be impacts on groups sharing protected characteristics.

5.9 Impact on business including civil society organisations

This measure introduces a number of minor changes to the hybrid and other mismatches regime to ensure that the regime operates as intended. This measure is not expected to have any impacts on businesses or civil society organisations who are undertaking normal commercial transactions.  It will only affect businesses with hybrid mismatch arrangements that arise from mismatches in international tax systems. Customer experience is therefore expected to remain broadly the same, as the measure does not change how businesses or civil society organisations who are undertaking normal commercial transactions interact with HMRC.

5.10 Operational impact (£ million) (HMRC or other)

There are estimated to be HMRC costs in the region of £1.03m to deliver this change which incorporates changes to IT systems.

5.11 Other impacts

Other impacts have been considered and none has been identified.

6. Monitoring and evaluation

The measure will be kept under review through communication with affected taxpayer groups.

7. Further advice

If you have any questions about this change, please contact Base Protection Policy Hybrids team. Email: mailboxhybrids@hmrc.gov.uk