Other tax rules on corporate finance: securitisation: periods beginning on or after 1 January 2007: the payments condition: failure to make a payment
The ‘payments condition’: failure to make a payment
Regulation 11(5) allows a payment to be included in ‘P’ even if it was not in fact paid, either because the company was legally prohibited from doing so, or where the company had a reasonable excuse for not making the payment.
The idea of ‘reasonable’ excuse for a failure to make a payment is not to be interpreted narrowly. It is intended to reflect what genuine and properly run securitisation companies actually do in practice. Provided the underlying criteria of the payments condition are fulfilled (see CFM72510) HMRC’s approach will be to establish that
- reasonable efforts have been made to ensure that the documentation fully reflects the payments condition; and
- the cash flows are being administered in accordance with good practice according to market standards, with a view to ensuring that payments are made in accordance with the transaction documentation.
‘Reasonable excuse’ will therefore be accepted as covering any failures to comply with the condition which result from unforeseen events or from oversights in administration or cash management or in the documentation itself.
Examples of ‘reasonable excuse’ are
- an amount left standing in a collection account and not moved in the normal way into holding and payment accounts as a result of an accidental failure in a complex cash management schedule to refer to an amount receivable under the transaction documentation;
- an amount left standing in a holding or payment account rather than being paid out, as a result of an accidental failure in the cash management schedule, or in the priority of payments, to refer to an amount which is payable under the transaction documentation;
- an amount left standing in a collection account as a result of a payment to the company in unforeseen circumstances, where there is no provision in the transaction documentation as to how that amount is to be applied.
These examples give some idea of the range and level of non-compliance with the payments condition which will be regarded as acceptable. They are not exhaustive. In general terms, ‘reasonable excuse’ refers to ordinary levels of human error, in documentation or in cash administration, which do not involve any deliberate flouting of the underlying rationale of the payments condition.