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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: modifications to other tax rules: other points

Other tax rules

Transfer pricing

See INTM566010 for guidance on thin capitalisation issues in securitisation structures, and INTM430000 for more on transfer pricing rules generally. A securitisation company within the regulations calculates its profit in accordance with Regulation 14 and not on the basis of its profits. It cannot self-assess an adjustment to those profits under TIOPA10/Part 4, nor can such an adjustment be sought by HMRC.

Deduction of tax

The normal rules that apply for the purposes of the loan relationships and derivative contracts legislation apply to a securitisation company, but as with other tax rules, they are then ‘switched off’ when the corporation tax charge under Regulation 14 comes to be applied (CFM72580).

ITA07/S980 explicitly disapplies any requirement to deduct tax from a derivative contract. This applies to securitisation companies as to any other company.

In most cases, payments between UK resident companies are exempt from the rules on deduction of tax at source in ITA07/S874 by virtue of ITA07/S930. This also allows gross payment by UK companies to UK permanent establishments (PEs) of non-resident companies, where the PE carries on a trade and is taxable under CTA09/S5(2). A UK PE of a foreign securitisation vehicle, although in practice unusual, will fall within this category and there will be no requirement for UK payers to deduct tax from payments to such PEs.

Non-resident securitisation companies

A non-resident company will be capable of qualifying as a securitisation company if, taking account of all its activities in the UK and elsewhere, it falls within one of the definitions in the regulations. A non-resident securitisation company may carry on a trade in the UK through a permanent establishment (CTA09/S5(2)). The company’s ‘retained profit’ under regulation 10 (CFM72480), and the tax charge under regulation 14 (CFM72580), will be calculated as for any securitisation company, having regard to all its activities, whether carried on in the UK or elsewhere. The tax charge under regulation 14 will be on the amount calculated under that regulation, so far as attributable to the UK permanent establishment in accordance with CTA09/S5.

Annual payments

The original and deferred consideration for the securitised assets paid by the bond issuer to the originator will be brought into account as credits under the loan relationship regime. In some securitisations the rights to further payments (such as early redemption fees by mortgage holders) may be sold on by the originator to third parties in the form of freely tradeable certificates. Such ‘residuals financing structures’ are becoming a common feature of the securitisation industry.

Although payments made by the issuer following the assignment of the certificates to third parties have some characteristics of annual payments (for example they are payable under legal agreements and are capable of recurrence), they are not usually pure income profit in the hands of the recipient, and will not be annual payments and thus require deduction of tax.

Whether or not such payments fall to be treated as annual payments will depend on the facts of the case. It is likely that arrangements made ‘off market’ or in a particularly complex manner will need further enquiry.