Policy paper

Changes to the hybrid and other mismatches regime for Corporation Tax

Published 3 March 2021

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.

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.

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 4 years, and by the fact that other jurisdictions have implemented equivalent rules since 2017.

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 was published on 12 November 2020 alongside draft legislation which was subject to a further, technical consultation, between 12 November 2020 and 7 January 2021.

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.

Detailed proposal

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

Operative date

Current law

The changes will have effect from 1 January 2017 in respect of those amendments relating to the acting together 5% rule, securitisation vehicles, investment trusts, relevant debt relief provisions, capital attribution tax adjustment (CATA), and the jurisdictional scope of s.259BE.

Changes in respect of investors with less than 10% interests in transparent funds, tax-exempt investors, the computation of overseas mismatches, illegitimate overseas deductions, the definition of foreign tax at s.259B(2), imported mismatches and dual inclusion income, will have effect from Royal Assent of the Finance Bill, though companies will be able to make a claim to apply the changes to dual inclusion income retrospectively.

Proposed revisions

Legislation is being 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 which has a tax akin to corporation tax. 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.
  • clarify the meaning of dual inclusion income within Chapter 5 Part 6A TIOPA 2010.
  • introduce a new chapter to allow for the allocation of dual inclusion income within a group if certain conditions are met.
  • 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.
  • introduce new provisions to ensure that hybrids counteractions are disapplied where they arise in respect of participants in transparent funds who hold investments of less than 10% in those funds.
  • amend s.259EB and s.259GB to prevent a counteraction where the recipient is a Qualifying Institutional Investor within the substantial shareholding exemption rules (TCGA 1992 sch.7AC, para 30A).
  • amend Chapter 11 to introduce a new s.259KE to limit the size of the counteraction in that section proportionately by reference to the imported mismatch payment made, taking account of any transfer pricing adjustment to that payment.
  • introduce s.192A to 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 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) and s.259BE(3)(a) and (b) to apply only to territories relevant to the particular structure being considered.
  • 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 investor or equivalent in chapter 10. This will be done by amending references to the income of any person as to refer only to a person other than the 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 connection test in Condition G of Chapter 11 so that in the absence of a structured arrangement, a counteraction is not potentially triggered where the parties to an overseas mismatch are connected to each other but not to the underlying UK payer.
  • introduce a new section relevant to 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.

Summary of impacts

Exchequer impact

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.

Economic impact

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

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 have an impact on family formation, stability or breakdown.

Equalities impacts

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

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.

Operational impact (£m) (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.

Other impacts

Other impacts have been considered and none has been identified.

Monitoring and evaluation

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

Further advice

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