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Methodology (part 3)

Published 17 December 2025

To help multinational enterprises (MNE) completing the imported hybrid mismatch analysis, HMRC have a recommended methodology.

The methodology is set out in steps. There are optional steps at the start. This is to allow MNE to choose the most efficient route to completing the imported hybrid mismatch analysis. The steps may be followed in any order — provided the UK business is satisfied that both:

• the analysis has been completed in full
• a counteraction conclusion has been reached

Evidence and documentation (part 6) contains details of the evidence to be obtained and kept by the UK business to support each step of imported hybrid mismatch analysis.

Involvement of group tax function

The key information required for MNE to undertake the imported hybrid mismatch analysis includes details of the corporate structures, intra-group transactional relationships and entity-level tax positions. HMRC understands the key information can in some cases be complex.

HMRC frequently observe that in a typical group structure situation, MNE will have a group tax function. This can also be known as the global tax team. We refer to this function as group tax in these guidelines. Group tax is commonly located in the head office territory. They are typically responsible for maintaining the key information and its dissemination.

The methodology relies on group tax’s ability to maintain and communicate key information. This is consistent with the approach advocated by the OECD BEPS Action 2-Final Report in its Recommendation 8 on the Imported mismatch rule.

It is best practice for a UK-headed group, that group tax both:

• maintain the key information
• make the key information accessible

This is to enable entities resident in other territories which have implemented hybrid mismatch rules to comply with the relevant legislation. Conversely, where the UK business is operating within an overseas headed group — it is best practice to ensure group tax is able to carry out this role.

Optional steps

MNE can choose to start with these optional steps or start at the top down steps. The most efficient approach depends on the particular facts and circumstances of MNE. The optional steps are most useful for MNE that operate in a limited number of territories or where the UK undertakes limited payments or quasi-payments. For example, where the group operates an overseas principal model and the UK company primarily transacts with the principal.

The optional steps should not be undertaken because group tax are unable or unwilling to provide some or all the information required for the completion of the top down steps. The imported hybrid mismatch analysis is a question of fact. The UK business and UK risk lead remain responsible for ensuring that their returns are correct in matters of fact and law as well as being complete. 

Where residual uncertainty remains and the return reflects the most likely to be correct position then following the best efforts recommendations in Help ensuring documents filed with HMRC are correct and complete GfC13, ensures HMRC is made aware of the position.

Optional step 1: identify UK payment and quasi-payments

UK business should identify all UK payments and quasi-payments made to non-UK resident entities or foreign permanent establishments in the same control group or structured arrangement. A record should be made of the type of payment and the territory that the payment or quasi-payment is made to. 

The UK business should both:

• obtain this information from suitably qualified representatives within the MNE
• ensure it’s reviewed by the UK risk lead for consistency with their knowledge of the business

Optional step 2: overseas territory capability of counteracting

For each UK payment or quasi-payment, the UK business will need to analyse whether it is reasonable to suppose that the recipient’s territory is:

• an OECD mismatch compliant territory
• capable of considering a hybrid mismatch under the law of that territory

This aligns to Condition E of the imported hybrid mismatch rules.

HMRC would expect this information to be supplied by group tax or by appropriately qualified individuals responsible for tax obligations in the applicable territory, such as the country tax manager or third party advisers.

Where all UK payments or quasi-payments are made to territories that are capable of counteracting hybrid mismatches — the UK business does not need to complete any further imported hybrid mismatch analysis. However they still need to ensure the work is reviewed — read step 5 of the top down steps. If some UK payments or quasi-payments are made to territories that are not capable of counteracting a hybrid mismatch or there is uncertainty with regard to whether the recipient is capable of counteracting a hybrid mismatch in accordance with Condition E, MNE will need to go on to complete the top down steps.

Top down methodology — the top down steps

Top down step 1: identify relevant hybrid mismatches

UK businesses should obtain from group tax details of any hybrid mismatches in the control group or structured arrangement as described in the OECD Neutralising the Effects of Hybrid Mismatch Arrangements, Action 2 - 2015 Final Report.

UK businesses should then review the identified hybrid mismatches to confirm whether they are a relevant mismatch. Broadly, this is the Condition D test for the imported hybrid mismatch rules.

To the extent that no relevant mismatch is identified, there is no need to complete step 2 onwards.

Top down step 2: identify over-arching arrangements

Step 2 applies where step 1 has identified a relevant mismatch. UK businesses then need to identify whether the relevant mismatch forms part of an over-arching arrangement. This is part of Condition C of the imported hybrid mismatch rules. HMRC expect that this information would be provided by group tax to the UK business. Elements of an imported hybrid mismatch (part 2) contains guidance on determining the over-arching arrangement.

Where a relevant mismatch forms part of an over-arching arrangement, UK businesses should obtain and retain details of all arrangements in this over-arching arrangement. This will assist with completing top down step 3.

There is no need to complete top down step 3 where either:

• a payment or quasi-payment made by an entity subject to UK Corporation Tax does not form part of the same over-arching arrangement as a relevant mismatch
• it has already been determined at optional step 2 that there is a territory capable of counteracting the relevant mismatch

Top down step 3: another territory’s capability to counteract the relevant mismatch 

Step 3 applies where Step 2 has identified a relevant mismatch that forms part of an over-arching arrangement.

UK businesses need to analyse whether it is reasonable to suppose that another territory is capable of counteracting the relevant mismatch.

The UK businesses will need to understand whether any territory in the over-arching arrangement — between the relevant mismatch and the UK payment or quasi-payment has hybrid mismatch provisions that are both:

• OECD mismatch compliant
• capable of considering the relevant mismatch under the law of the territory either partially or in full

Typically this information is supplied by group tax. Alternatively appropriately qualified individuals responsible for tax obligations in the applicable territory supply the information. For example, the country tax manager or third-party advisers.

Where it is reasonable to suppose that another territory is capable of counteracting the relevant mismatch in full — there is no need to complete Step 4.

Where it is reasonable to suppose that another territory is partially capable of counteracting the relevant mismatch — Step 4 will need to be completed for the part of the relevant mismatch that is not capable of the counteraction.

Top down step 4: determine the counteraction

Where steps 1 to 3 determine that a counteraction is required:

• refer to guidance INTM559300 – Hybrids: imported mismatches (Chapter 11): counteraction and examples at INTM559400 – Hybrids: imported mismatches (Chapter 11): examples for assistance with calculating the counteraction

• refer to part 5 of these guidelines for details of the disclosure that should be made in the tax computation

HMRC understands counteraction calculations can be complex. It often requires the calculation of a just and reasonable apportionment.  Refer to INTM559310 – Hybrids: imported mismatches (Chapter 11): apportioning the relevant mismatch for further guidance.

Where genuine uncertainty remains, HMRC expects MNE to seek clearance. This is through HMRC’s non-statutory clearance process. INTM561720 – Hybrids: operational guidance: non-statutory requests for clarification (clearance applications) contains further details.

Top down step 5: review of imported hybrid mismatch analysis 

Best practice is for the UK risk lead to review the evidence and documentation for the imported hybrid mismatch analysis every year.  This review aims to reconfirm that the underlying facts and analysis applies. A review by a UK risk lead, of the facts relied upon and outcomes, provides useful governance. This is because the UK risk lead will have a wider knowledge of:

• the UK and global business
• how it operates
• key business triggers

HMRC expects a UK risk lead will use this knowledge to inform the understanding of the hybrids position for the year under review. We do not recommend relying on information from previous years without robust checks and testing.

Where the underlying facts and analysis cannot be reconfirmed, the UK risk lead would be responsible for ensuring that competent tax professionals perform a re-analysis.  

Key triggers to explore when considering changes from the previous year are new inter-company transactions, alterations of the group structure and changes to the tax attributes of group entities, such as: 

• an entity’s check the box status for US tax purposes
• tax residence
• profit attribution between a company’s head office and its permanent establishment(s)
• underlying tax regimes that the entities are subject to
• new loan relationships
• transactions that required advance consideration of the application of the hybrid mismatches rules

Retaining contemporaneous business records to demonstrate, with underlying evidence, the review by the UK risk lead is highly relevant to penalty determination when adjustments arise during enquiry.