Corporation Tax: amendments to Regulatory Capital Securities Regulations
Published 17 December 2015
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Who is likely to be affected
Banks, building societies, insurers and investment firms.
General description of the measure
This measure sets out the tax treatment of new types of financial instrument issued by insurance companies to meet regulatory requirements. It also updates existing regulations to reflect the current terms used in the taxation of corporate debt and derivative contracts rules introduced in Finance (No.2) Act 2015.
Policy objective
This measure provides certainty of treatment of regulatory capital securities issued by banks, building societies and insurers to comply with financial regulatory requirements.
Background to the measure
A consultation on the draft regulations opened on 15 July 2015 and closed on 9 September 2015.
Detailed proposal
Operative date
The measure will have effect from 1 January 2016.
Current law
Section 221 Finance Act 2012 allows HM Treasury to make regulations in relation to the tax treatment of securities issued in relation to any regulatory requirement imposed by EU legislation.
The EU Solvency II Directive introduces a new, harmonised regulatory regime across the EU for insurers. As part of this, from 1 January 2016, insurers will be required to hold new types of regulatory capital designed to boost loss absorbency and improve financial stability.
Existing tax law does not explicitly set out the tax treatment of these new types of instrument, and in particular the tax treatment of coupons paid to investors.
The Taxation of Regulatory Capital Securities Regulations 2013, made under section 221, already set out the treatment of similar securities issued by banks and building societies.
Proposed revisions
This measure provides that insurers’ Tier 1 and Tier 2 compliant Solvency II instruments issued in the form of debt will be taxed as debt instruments. This does not include securities that are shares.
The measure amends the existing Taxation of Regulatory Capital Securities Regulations 2013 by extending the definition of the term “regulatory capital security” to include certain Tier 1 and Tier 2 items within the Commission Delegated Regulation (EU) 2015/35.
The measure excludes credits and debits on certain conversions of the new types of regulatory capital from the loan relationships rules in Part 5 of the Corporation Tax Act 2009 (CTA 09).
There are also updates to the Regulations making consequential amendments to reflect recent changes made to Part 5 CTA 2009 by the Finance (No.2) Act 2015.
In particular, a new regulation is inserted into the Regulatory Capital Securities Regulations 2013 to ensure that payments of a coupon in respect of regulatory securities will continue to be deductible in respect of amounts that are recognised in equity.
This measure takes effect for accounting periods starting on or after 1 January 2016, to coincide with the Solvency II Commission Delegated Regulation (EU) 2015/35, and to align with the commencement of the changes to Part 5 CTA 2009.
Transitional provisions ensure that Solvency II compliant Tier 1 and Tier 2 securities issued before 1 January 2016 are covered by the Regulations. Securities subject to the Prudential Regulation Authority (PRA) transitional arrangements, set out at rule 4.2 in the Annex to the PRA Rulebook: Solvency II Firms: Transitional Measures Instrument 2015 are also covered by the Regulations.
Summary of impacts
Exchequer impact (£m)
| 2015 to 2016 | 2016 to 2017 | 2017 to 2018 | 2018 to 2019 | 2019 to 2020 | 2020 to 2021 |
|---|---|---|---|---|---|
Economic impact
This measure is not expected to have any economic impacts.
Impact on individuals, households and families
No direct impacts on individuals and households have been identified; it relates to financial institutions that are subject to the Solvency II Directive.
The measure is not expected to impact on family formation, stability or breakdown.
Equalities impacts
There are no impacts on any group which share a protected characteristic.
Impact on business including civil society organisations
This measure is expected to have a negligible impact on businesses and civil society organisations.
This measure will only affect insurance companies issuing capital instruments to comply with the Solvency II Directive.
Operational impact (£m) (HM Revenue and Customs (HMRC) or other)
No additional costs or savings for HMRC are anticipated.
Other impacts
This policy will be kept under review through ongoing communication with taxpayer groups affected by the measure.
Monitoring and evaluation
This policy will be kept under review through ongoing communication with taxpayer groups affected by the measure.
Further advice
If you have any questions about this change, please contact Hayley Moran on Telephone: 03000 514 795 or email: hayley.moran@hmrc.gsi.gov.uk.
Declaration
David Gauke 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.