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HMRC internal manual

Corporate Finance Manual

Other tax rules on corporate finance: securitisation: periods beginning on or after 1 January 2007: the regulations: scope

Regulation 3: scope

Regulation 3 sets out the scope of the regulations. The regulations apply to a ‘securitisation company’ as defined in regulations 4 to 10. These are five specified types of company in Regulations 5 to 9, each of which has to have a ‘retained profit’ (defined in Regulation 10).

Certain ‘specified’ regulations do not apply to companies that do not meet the ‘payments condition’ or have had an ‘unallowable purpose’ at any time. The specified regulations are the special corporation tax charge in Regulation 14 and the modifications to the normal corporation tax rules in Regulations 16 to 20.

So a company will only be taxed under the special rules in the securitisation regime if it:

  • conforms to the definition of a securitisation company (Regulations 4 to 9)
  • has a retained profit (Regulation 10)
  • complies with the payments condition (Regulation 11) (CFM72510)
  • does not have an unallowable purpose (Regulation 12) (CFM72570).

The consequence of failing the payments condition or unallowable purposes tests is that the company will no longer be taxed under Regulation 14, and will be taxed under normal CT rules. Once out of the regime due to failing the payments condition or having an unallowable purpose, it is permanently excluded (see Regulation 21). This is to ensure that a company does not contrive to be taxed under the securitisation rules when it has profits, but under normal CT rules when it has losses.

Exclusion from the regime will be a rare event. Compliance with the payments condition will normally be a routine matter in practice. The unallowable purposes test is there to prevent avoidance and is similar to the unallowable purposes tests found in other parts of the Taxes Acts.

‘Securitisation companies’ not taxed under these regulations

Regulations 11 and 12 disapply the special corporation tax charge in Regulation 14 and the modifications to other tax rules in Regulation 16 to 20 (CFM72630) where a company fails the payments condition or the unallowable purposes test. It will still be a ‘securitisation company’ within the scope of these regulations, and other securitisation companies in the chain will be unaffected by the fact that one company has failed the payments condition or the unallowable purposes test. The failed company will be taxed in accordance with its accounts (either IAS or UK GAAP). A company that was originally in the interim regime in FA05/S83 (and elected into the permanent regime) will not go back to being taxed according to the interim regime, although if its accounts are prepared under UK GAAP (excluding FRS25 and FRS26) it may come to the same thing. In such cases, Regulation 21 prevents the company from reverting to being taxed under section 83.

However, a company may cease to be within the scope of the regime by failing the definition of a ‘securitisation company’ in Regulations 4 to 9. Such a company will, if it was originally within FA05/S83 and still meets the definitions in that legislation, go back to being taxed under FA05/S83 (CFM72210). This is because in such a case the company will be entirely outside the application of the regulations, including Regulation 21.