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HMRC internal manual

Corporate Finance Manual

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HM Revenue & Customs
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Other tax rules on corporate finance: securitisation: periods beginning on or after 1 January 2007: the regulations: the corporation tax charge: the formula: ‘RP’ and ‘DS’

The corporation tax charge: the formula: ‘RP’ and ‘DS’

Regulation 14(1) sets out the basis on which a securitisation company that meets the definitions in Regulations 4 to 9, and meets the payments and retained profit conditions, is taxed. In essence it is taxable on the small amount of cash retained in the company for its own account. In practice, most amounts which are so retained by securitisation companies will be distributed sooner or later by way of dividend. The retention is in effect the same as the small ‘turn’ or cash profit that would in most cases have been reflected in accounts if UK GAAP as it stood at 31 December 2004 had continued to apply to such companies.

However, it is not sufficient to use the definition of ‘retained profit’ in Regulation 10, since that is essentially a ‘cash in, cash out’ calculation. Under Regulation 10, the amounts in and out will include dividends received from and paid to another company in the securitisation chain. Hence the formula in Regulation 14 excludes such amounts from the retained profit on which the company is taxed. Regulation 14 also provides for a ‘catch-up’ charge if the company pays out more profits in the form of dividends than have been subject to tax.

The taxable amount is the greater of RP-DS+D, and Nil, plus the ‘specified amount’. These terms are defined in Regulation 14(2) and 14(3). CFM72600 explains the ‘specified amount’.

RP

RP is the retained profit of the company in the accounting period. Retained profit is defined in Regulation 10 (CFM72480).

DS

DS is any distribution received from another securitisation company that is party to the same CMA and which is made from the other company’s retained profit. However, where the dividend is received from another securitisation company (or through a chain of securitisation companies), the amount in question will have been taxed in the securitisation company which paid the original dividend and the definition of DS thus prevents double counting of the same amounts.

It will depend on the terms of the relevant capital market arrangement and related transactions whether the amount of the dividend received from another securitisation company is or is not included in the recipient company’s ‘retained profit’ as defined in Regulation 10 (CFM72480). If the dividend received is included in retained profit, it will constitute or form part of ‘RP’, but will be deducted from RP in calculating the taxable amount; if the dividend received is not included in retained profit, it will still be deducted from RP in calculating the taxable amount, but not so as to reduce the taxable amount to less than zero. This is necessary in order to ensure that DS prevents double counting, as described above, in either scenario.

If a securitisation company receives a dividend from a company which is not a securitisation company, the position will depend on whether or not the dividend received is included in RP. If the dividend received is not included in RP, it will not be subject to the charge under Regulation 14. If the dividend received is included in RP, it will be subject to the charge under Regulation 14 notwithstanding CTA09/S1285 (which would be overridden in this instance by the treatment of the recipient securitisation company under the regulations).

In practice it will be unusual for one securitisation company to hold shares in another, and amounts of ‘DS’ will be rare.