Policy paper

Corporation Tax: updating the securitisation regime

Published 4 December 2017

Who is likely to be affected

Securitisation companies who are taxed under the permanent securitisation regime (explained in Background to the measure) and persons who have transactions with such companies, such as investors and businesses who raise finance through securitisation.

General description of the measure

This measure will clarify specific areas of uncertainty over the appropriate tax treatment of securitisation companies. It will also rectify an existing condition that has become ineffective, due to a change in accounting standards. This will be achieved by amending existing regulations.

Policy objective

Changes to the existing regulations will remove uncertainty over the tax treatment of securitisation companies and ensure these companies are subject to an appropriate tax charge. This measure supports the government’s objectives of maintaining the competitiveness of the UK’s financial services sector, protecting revenue and reducing the administrative burden of taxation.

Background to the measure

Securitisation companies are used as part of certain transactions (securitisations) undertaken by businesses seeking to raise funds in the capital markets. They are used to issue debt to the market and to hold assets as security. The introduction of International Accounting Standards in 2005 led to increased volatility in the accounting results and therefore the taxable profits, of such companies. This made it difficult for rating agencies to rate the debt and could have placed these capital-raising transactions in jeopardy, adversely impacting the UK economy.

In 2006 the government therefore introduced regulations applying specific Corporation Tax rules to companies involved in the securitisation of financial assets known as the ‘permanent regime’. These rules have worked well, but need updating to reflect recent accounting standards changes and commercial developments.

At Budget 2016 the government announced that a consultative working group had been formed to consider possible changes to the existing regulations to protect revenue, reduce administrative complexity and make the UK financial services sector more competitive. Legislation was introduced in Finance Act 2016 to widen the regulation-making power to include the Income Tax Acts. A Tax Information and Impact Note was published on 16 March 2016 relating to this legislative change.

The government is now seeking comments on draft regulations to implement the proposed changes developed with the group.

Detailed proposal

Operative date

The regulations are expected to come into force in early 2018.

Current law

The current law is set out in Chapter 4, Part 13 of Corporation Taxes Act 2010. This defines a ‘securitisation company’. The Taxation of Securitisation Companies Regulations 2006 (Statutory Instrument 2006/3296) set out the detailed rules applicable to securitisation companies.

Proposed revisions

Following a period for public comment on the draft regulations, a Statutory Instrument will be introduced to amend The Taxation of Securitisation Companies Regulations 2006 (Statutory Instrument 2006/3296). The regulations will be amended by the following changes.

(1) Removal of withholding tax obligation on annual payments

There can be uncertainty as to whether certain payments made by, or on behalf of, securitisation companies known as ‘residual payments’ constitute ‘annual payments’ for tax purposes from which it is necessary for the payer to withhold Income Tax. Currently businesses write to HM Revenue and Customs to seek clearance that these payments will not be annual payments and so can be paid without withholding tax. As announced in Budget 2016, this uncertainty will be eliminated by removing the obligation to withhold income tax in respect of such payments.

(2) New revised financial asset definition

The Corporation Tax rules for securitisation companies apply to the securitisation of ‘financial assets’. This category, which is based on the accounting treatment, excludes shares and land. From 1 January 2015, new accounting standards changed the treatment of certain instruments that include an embedded derivative, so that the current exclusion is no longer effective. A new definition will maintain the policy intention that loans with embedded derivatives over shares or land are excluded.

The revised rules will also clarify uncertainty of treatment when a securitisation company acquires a portfolio which might include small and insignificant non-financial assets, which could otherwise cause the securitisation to fall outside of the regime.

(3) Exclusion from recovery of unpaid Corporation Tax provisions

There can be uncertainty as to whether a securitisation company falls within the scope of legislation introduced to counter schemes which exploited the rules on company purchases. That legislation could result in a securitisation company becoming liable for unpaid Corporation Tax of other linked companies. The possibility of it applying is remote in practice but needs to be considered in every proposed transaction. This uncertainty will be eliminated by explicitly excluding securitisation companies from the scope of the legislation.

(4) Amended definition of a ‘warehouse company’

A ‘warehouse company’ holds the financial assets to be securitised until the portfolio is large enough and market conditions allow the securitisation to take place. There are tax rules governing a warehouse company’s holdings in the notes issued to the investors or the financial asset portfolio. Minor modifications are required to align these with regulatory requirements. This will also facilitate certain types of commercial arrangements by which the portfolio is transferred out of the warehouse company to enable the securitisation to take place.

Summary of impacts

Exchequer impact (£m)

2017 to 2018	2018 to 2019	2019 to 2020	2020 to 2021	2021 to 2022	2022 to 2023
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 impact.

Impact on individuals, households and families

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

There is no impact on family formation, stability or breakdown.

Equalities impacts

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

Impact on business including civil society organisations

This measure will impact on all businesses who raise finance via securitisation. The changes will make sure that the regulations are clear and understandable and will provide businesses with increased certainty. This measure is expected to have a negligible impact on business administrative burdens. One off costs include familiarisation with the new rules. It is not expected that there will be any on-going costs.

There is no impact on civil society organisations.

Operational impact (£m) (HMRC or other)

While 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 585 876 or email: elizabeth.ward-penny@hmrc.gsi.gov.uk.

Declaration

Mel Stride 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.