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HMRC internal manual

Corporate Finance Manual

Other tax rules on corporate finance: securitisation: periods beginning on or after 1 January 2005: overview of the new rules

Impact of International Accounting Standards

Listed companies are required to use International Accounting Standards (IAS) in their consolidated accounts for periods of account beginning on or after 1 January 2005, and other companies can apply IAS at the single company level from the same date (CFM20040). The main impact of IAS on companies involved in securitisations comes from IAS32 and IAS39, and from the equivalent standards in revised UK GAAP - FRS25 and FRS26.

Prior to 2005, UK GAAP allowed the accounting profit of securitisation vehicles to reflect the small ‘turn’ made by the SPV over the life of the securitisation. The effect of IAS39 would be to produce an uneven pattern of profits and losses in the SPV. This could result in tax liabilities which the SPV, as essentially a cash conduit, would be unable to pay. In order to address the problem, legislation was introduced in Finance Act 2005 to provide an interim solution to allow companies to continue to apply UK GAAP until 31 December 2006, and to allow for regulations to be made to create a permanent tax regime for ‘securitisation companies’.

The interim regime

FA05/S83 allows UK GAAP as it stood at 31 December 2004 (‘old UK GAAP’) to continue to apply to securitisation companies. This was an interim measure to allow time for a permanent tax regime for securitisation companies to be developed. Regulations were made in December 2006 which created a permanent regime for companies involved in the securitisation of financial assets. Rules for other types of securitisation, involving real estate and insurance, have been implemented (in the case of insurance) or are in the course of development (in the case of real estate).

FA05/S83 originally applied for periods beginning on or after 1 January 2005 and ending before 1 January 2007. In Finance Act 2006, this interim period was extended to periods ending before 1 January 2008. Finance Act 2007 contained a power to allow the interim regime to be extended by regulation. Regulations made under this power extend the interim regime to periods ending on or before 1 January 2017. Where a securitisation company was taxed under old UK GAAP under FA05/S83, and does not transfer to one of the permanent regimes, it will continue to be taxed in accordance with FA05/S83 until 2017.

CFM72210 onwards gives more details.

The permanent regime

The permanent regime is set out in the Taxation of Securitisation Companies Regulations 2006 (SI 2006/3296). The regulations were made under the powers in FA05/S84 .

The rules operate by defining certain companies as ‘securitisation companies’. The basic definition is set out in CTA10/S623 (CFM72360). The regulations then provide detailed rules for the types of company that can be treated as a securitisation company (CFM72370). A company that meets the definition of a securitisation company is then taxed on its ‘retained profit’ rather than on the profit shown in its accounts. This is broadly comparable to the taxation of such companies under UK GAAP as at 31 December 2004, that is, on the small amount of profit retained in the securitisation vehicle.

The permanent regime applies to a company involved in the securitisation of ‘financial assets’ with effect from the beginning of its first accounting period commencing on or after 1 January 2007.

The application of the guidance

The securitisation industry is a rapidly changing sector, and the tax rules are new and are likely to be subject to further legislation. There may be cases where this guidance does not cover the circumstances of particular cases. It is recognised that the application of the rules will need to be considered with regard to the facts of such cases, bearing in mind that the legislation is intended to apply to genuine securitisations involving capital market funding.