INTM489819 - Diverted Profits Tax: application of Diverted Profits Tax: examples and particular situations: securitisation

A company that meets the conditions of the regulations at SI 2006 3296, including the unallowable purpose rules (see CFM72570), is taxable (in accordance with regulation 14) on the basis of cash retained rather than on its profits as calculated under the normal corporation tax rules (see CFM72610). Where the participation condition is met (see INTM489725) transactions to transfer assets from the originator (or another company providing securitised assets) to a securitisation company within the requirements of the regulations could be seen as potentially giving rise to an effective tax mismatch outcome. In some cases such an outcome may not be within the excepted loan relationship outcome exclusion.

However, the insufficient economic substance condition requires the consideration of whether transactions or the involvement of an entity have been designed to secure the tax reduction identified. Although there would certainly have been careful consideration around ensuring that the arrangements met the conditions for the tax treatment provided for by the regulations to apply, HMRC would not expect that to amount to “design to secure the tax reduction” in the sense of section 110 (see INTM489765 and INTM489770). There would be no element of contrivance, nor any material difference between those arrangements and those that would have otherwise been made to achieve the same commercial purposes. As long as the arrangements fall within the regulations it would not be reasonable to assume that such a transaction or the involvement of the securitisation company in it had been designed to secure the tax reduction.

As described at CFM72500 where a company fails to meet the conditions at regulation 11 (‘payments condition’) and regulation 12 (‘unallowable purposes test’) the special corporation tax charge in regulation 14 and other modifications provided by the regulations to the normal corporation tax rules do not apply to it. It will still be a ‘securitisation company’ unless it also falls outside the scope of the definitions in regulations 4 to 10.

Because of the way in which the charge under regulation 14 works it would not be expected that the DPT rules would operate to result in any charge to DPT on a securitisation company that meets all the conditions under the regulations. However, HMRC is aware that, particularly in the context of legal advisers providing opinions as to the tax treatment of arrangements, there may be some degree of uncertainty - for example as to whether the participation condition is met in respect of other entities and as to whether transactions could potentially give rise to effective tax mismatch outcomes. In some cases, for example in the context of a whole business securitisation where a securitisation company issues notes and lends the proceeds to the securitised group, it may be clear (other than where debt is issued on a limited recourse basis) that any such mismatch outcomes would arise wholly from something which would produce debits and credits under Part 5 Corporation Tax Act 2009 and would therefore be within the excepted loan relationship outcome exclusion.

However, there are many situations where this will not be the case and some transactions between the securitisation company and originator could potentially be seen as having been “designed” to ensure that the conditions of the regulations are met (for example in terms of the timing of payments in order to ensure that the payments condition is satisfied). As long as the securitisation company meets the conditions for the corporation tax charged by regulation 14 to apply, the arrangements should be seen in the context of the securitisation company being within that tax charge. In that context it would not be reasonable to assume that such transactions, or the involvement of the originator (or another company that has provided securitised assets), were designed to secure a particular effective tax mismatch outcome. They would therefore not give rise to any charge to DPT on the securitisation company.