INTM553010 - Hybrids: hybrid payer (Chapter 5): overview

Chapter 5 of Part 6A TIOPA 2010 counters deduction/non-inclusion mismatches that it is reasonable to suppose would otherwise arise from payments or quasi-payments because the payer is a hybrid entity, where

  • there is an allowable deduction for the payer that exceeds the sum of ordinary income arising to the payee(s) for a permitted taxable period (a deduction/non-inclusion (D/NI) mismatch), and
  • all or part of that excess arises because the payer is a hybrid entity

Hybrid entity

A hybrid entity for the purpose of Chapter 5 of Part 6A TIOPA 10 is defined at s259BE as an entity that is regarded as a person for tax purposes under the law of any territory, and

  • any of the income or profits of the entity are treated by any territory wholly or partly as the income or profits of a different person, or
  • the entity is not regarded as a separate person for tax purposes under the law of a different territory

Whether an entity has the relevant characteristics to be treated as a ‘hybrid entity’ is discussed at INTM550580.

Payments and quasi-payments

Payments and quasi-payments are discussed at INTM550540.

Ordinary income

Ordinary income means income that is brought into account when calculating taxable profits on which tax is charged. The full definition, including restrictions on what may be regarded as ordinary income, and where specific reliefs may be treated as reducing the amount of ordinary income, is at s259BC and the concept is discussed at INTM550560.

There are special recognition rules at s259BD in instances of non-inclusion for treating an amount of income as if it had been included where it has been subjected to another territory’s controlled foreign companies (CFC) charge. This is discussed at INTM550570.

Conditions to be satisfied

Chapter 5 applies where the five conditions (A to E) identified in s259EA TIOPA 2010 are met. These conditions are

Condition A

  • There is a payment or quasi payment under, or in connection with, an arrangement, see INTM553030

Condition B

Condition C

  • Either the hybrid payer or a payee is within the charge to UK corporation tax, see INTM553050

Condition D

  • It is reasonable to suppose that there would be a hybrid payer deduction/non-inclusion mismatch if it were not countered by this legislation or equivalent legislation outside the UK, see INTM553060

Condition E

  • There is a quasi-payment and the hybrid payer is also a payee, or
  • The hybrid payer and a payee are in the same control group, or
  • The arrangement is a structured arrangement, see INTM553070

The mismatch is the amount of the excess which arises by reason of the hybrid payer being a hybrid entity. It does not matter if the excess arises for reasons other than the hybridity of the payer.

Counteraction

If all 5 conditions are met, the mismatch is countered by restricting the use of the deduction to sheltering ‘dual inclusion income’, that is, income taxed in the hands of both the hybrid payer and its investor.

Where the amount of the restricted deduction exceeds the amount of dual inclusion income available in the period in which the deduction arises, the excess can be carried forward.

It is important to note therefore that the counteraction under Chapter 5 does not deny a deduction but limits how it is used. So, reliefs that rely on the existence of a deduction may still be available despite the deduction in question being subject to a counteraction under Chapter 5. For example, Research and Development tax relief, which provides for additional relief for expenditure, is not denied by the restricted use of a deduction under Chapter 5.