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HMRC internal manual

Corporate Finance Manual

Other tax rules on corporate finance: securitisation: periods beginning before 1 January 2005: general points

General points

Tax status of the issuer SPV

In most cases, the issuer SPV will be carrying on an investment business (the acquisition and managing of a pool of investments). Usually, originators have been careful to ensure that a very small amount of profit is retained in the SPV, so that they will qualify as investment companies.

Earlier Inland Revenue guidance suggested an acceptable specific profit margin, but because of the increasing range and complexity of securitisation transactions HMRC no longer considers it appropriate to give a precise figure for an acceptable level of profit to be retained by the SPV.

Group relief

Clearly, in the case of an independent, bankruptcy remote SPV, there is no link with the originating entity. It follows that if there are tax liabilities arising in the SPV, these cannot be covered by group relief from the originating group. This is another reason why securitisation structures generally ensure that uneven or excess taxable profits do not arise in the SPV.

Spreading of costs

The costs of setting up the securitisation should normally be governed by the accounting treatment. There may be basic wholly and exclusively and capital/revenue arguments, but generally there are not. The costs of setting up the securitisation structure will normally be spread (amortised) over the life of the securitisation, as will costs of credit enhancement.

Transfer pricing

Although the transfer of assets or rights to income streams at the start of a securitisation invariably takes place at arm’s length, there may be transfer pricing issues or thin capitalisation issues as regards funding costs and other incidental matters.

The International Manual contains some guidance in relation to securitisations and thin capitalisation at INTM566030 and INTM566040.

Sale of rights to securitised income stream

On occasion an originating entity may decide - for commercial reasons - that rather than continue to enjoy periodic payments of profit extraction from the SPV, they will sell their rights to receive such payments to a third party. Of course, the originating entity may have other rights and obligations in relation to the securitisation, which it will retain. The precise mechanism of such a sale, and how the sale proceeds are accounted for, will vary from transaction to transaction. As with any other transaction, it is possible that such a sale of rights will be used by the originator as an opportunity to convert annual revenue income into a one-off capital receipt. Advice should be sought from CTIAA (Financial Products Team).

Indirect tax issues

Securitisation structures can often cause difficulties within VAT partial exemption methods, particularly in relation to the treatment of the servicer fee. Technical advice can be obtained from your regional Partial Exemption Senior Officer. Additionally, specific cases where VAT avoidance is suspected should be referred to CTIAA (Anti-Avoidance Group).