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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: the corporation tax charge: the formula: ‘D’

The corporation tax charge: the formula: ‘D’

D is the lesser of:

  • the sum of dividends paid by the securitisation company in this and any earlier accounting period less:

    • the retained profit for the period
    • amounts previously taxed under Regulation 14
    • amounts previously taken into account as ‘DS’
    • dividends paid out before the company became subject to the securitisation regime,
  • and Nil.

What does ‘D’ achieve?

‘D’ is the ‘catch up charge’. Normally the company’s taxable profit (‘RP’) will comprise only the small amount of cash retained by the company, which it will pay away as dividends, usually to the trust. The subtraction of DS, as explained above, prevents double counting of amounts similarly taxed as RP in other securitisation companies in the chain.

‘D’ brings into charge any amounts which have escaped being included in ‘RP’, when they are distributed. For example, a company might retain an amount in breach of the normal terms of the payments condition because (say) the transaction documents accidentally failed to make any provision as to how that amount was to be applied. In that case, the ‘reasonable excuse’ defence would apply (CFM72570). If the company subsequently distributed that amount by way of dividend, the amount of that dividend would be included in ‘D’.

To avoid double counting, ‘D’ excludes amounts already taxed as securitisation company profit in the current or any earlier period, or inter-company dividends (again, already taxed as securitisation company profits) and company dividends paid out of pre-securitisation regime profits. If the calculation of ‘D’ results in a negative number it is ignored.

Note, in connection with this example, that the definition of ‘retained profit’ in regulation 10 is designed to capture all amounts that are retained by a securitisation company by way of profit. The effect of regulation 10 is that any retention (beyond the period allowed by the payments condition) of amounts other than ‘RP’ and ‘RA’ will cause a breach of the payments condition and hence prevent the company from qualifying as a securitisation company for the relevant accounting period and at all times thereafter. ‘D’ therefore covers the case where a company does not breach the payments condition but nevertheless has retained amounts which have not been included in RP or RA and which have not been taxed.