Policy paper

Corporation Tax: securitisation and annual payments

Published 16 March 2016

Who is likely to be affected

Securitisation companies (see explanation in Background) and persons who have transactions with such companies.

General description of the measure

This measure amends HM Treasury’s existing power to make regulations concerning the taxation of securitisation companies. This will permit changes to be made to regulations concerning the treatment of certain payments, known as ‘residual payments’, made by securitisation companies, to clarify that these will not be treated as annual payments and so can be paid without withholding tax.

Policy objective

This measure supports the government’s objectives of improving the competitiveness of the UK as a financial centre and reducing the administrative burden of taxation. It will permit the amendment of regulations to clarify a specific area of uncertainty about the withholding of tax from certain payments made by securitisation companies to their investors.

Background to the measure

This measure was announced at Budget 2016. Securitisation companies are used as part of certain transactions (securitisations) undertaken by some businesses seeking to raise funds in the capital markets. They are used to issue debt to the market and to hold assets as security. Commercially, these transactions depend on the quality of the debt issued as determined by rating agencies. The introduction of International Accounting Standards in 2005 made the accounting results and therefore the taxable profits, of securitisation companies more volatile. This volatility would make it difficult for rating agencies to rate the debt and could place these capital-raising transactions in jeopardy.

In 2006 the government therefore introduced regulations to establish a regime with specific corporation tax rules for companies involved in the securitisation of financial assets.

These rules have worked well, but are now falling behind recent accounting and commercial developments. A consultative working group was therefore formed and met for the first time in October 2015 to consider possible technical changes to the existing regulations. Discussions in the working group confirmed a particular difficulty with the tax treatment of residual payments.

Residual payments arise because special purpose vehicles typically contain more financial assets than are likely to be required to repay the investors, meet transaction costs and retain a profit. This excess protects against possible poor performance of the assets and enables the special purpose vehicle to obtain an attractive credit rating.

There can be uncertainty as to whether the residual payments should be classified as ‘annual payments’, and therefore whether they should be subject to withholding tax. Currently, this uncertainty is addressed by writing to HM Revenue and Customs (HMRC) to seek clearance that residual payments will not be annual payments and so can be paid without withholding tax. This uncertainty can be eliminated by removing the obligation to withhold income tax in respect of such payments.

Detailed proposal

Operative date

The measure will have effect on and after the date of Royal Assent to Finance Bill 2016 and the changes will be reflected in revised securitisation regulations following a public consultation.

Current law

The current law is set out in Chapter 4, Part 13 of Corporation Tax Act 2010. This defines a ‘securitisation company’ and contains the power to make regulations about the taxation of securitisation companies. Detailed rules which make provision for the application of the Corporation Tax Acts in relation to a securitisation company are set out in 2 sets of regulations:

• the Taxation of Securitisation Companies Regulations 2006 (Statutory Instrument 2006/3296)
• the Taxation of Insurance Securitisation Companies Regulations 2007” (Statutory Instrument 2007/3402)

Proposed revisions

The existing power permits regulations concerning the application of provisions in the Corporation Tax Acts only. Legislation will be introduced in Finance Bill 2016 to widen the power to permit regulations concerning the application of the Taxes Acts, so encompassing the Income Tax Acts under which the potential withholding tax charge is imposed on annual payments. Detailed regulations made under this power will be developed in consultation with interested parties.

Summary of impacts

Exchequer impact (£m)

2016 to 2017	2017 to 2018	2018 to 2019	2019 to 2020	2020 to 2021
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 macroeconomic impacts.

Impact on individuals, households and families

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

Equalities impacts

It is not anticipated that the measure will have any adverse impact on groups with protected characteristics.

Impact on business including civil society organisations

This measure is expected to have a negligible impact on businesses. It is expected to deliver negligible savings to businesses mainly in the financial sector who undertake securitisation transactions and who as a result of this measure will no longer need to seek clearances from HMRC. There is no impact on civil society organisations.

Operational impact (£m) (HMRC or other)

Whilst this measure will reduce a number of clearance applications it is not anticipated to have a significant operational impact on HMRC.

Other impacts

Other impacts have been considered and none have been identified.

Monitoring and evaluation

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

Further advice

If you have any questions about this change, please contact Elizabeth Ward-Penny on Telephone: 03000 585876 or email: elizabeth.ward-penny@hmrc.gsi.gov.uk.

Steven Tovey on Telephone: 03000 542532 or email: steven.tovey@hmrc.gsi.gov.uk.