INTM557010 - Hybrids: hybrid entity double deduction mismatches (Chapter 9): overview

Chapter 9 of Part 6A TIOPA 2010 counters mismatches involving hybrid entities where it is reasonable to suppose that all or part of an amount could be deducted from

  • the income of the hybrid entity for a taxable period of the entity, and
  • the income of an investor in the hybrid entity for a taxable period of that investor

Conditions to be satisfied

The legislation applies where 3 conditions (A to C) are met.

Condition A

  • there is an amount (or part of an amount) that it is reasonable to assume could be deducted from the income of both the hybrid entity and an investor in the hybrid entity for the purposes of calculating their respective taxable profits, in different jurisdictions, see INTM557030

Condition B

  • either the hybrid entity or any of the investors in the hybrid entity are within the charge to UK corporation tax, see INTM557040

Condition C

  • the hybrid entity and any investor are related at any time in the hybrid or investor taxable periods: or it is reasonable to suppose that the arrangement is a structured arrangement either designed to secure the mismatch or under which the economic benefits of the mismatch are shared, see INTM557050

Counteraction

If all three conditions are met, the mismatch is then countered by

  • restricting the use of all or part of the deduction claimed by the investor(s) to the sheltering of dual inclusion income where they are within the charge to corporation tax, see INTM557070, or
  • restricting the use of all or part of the deduction claimed by the hybrid entity to the sheltering of dual inclusion income where the hybrid entity is within the charge to corporation tax, see INTM557075

It is important to note that the counteraction under Chapter 9 generally does not deny a deduction but limits how it is used. So, claims for reliefs that rely on the existence of a deduction may still be available despite the deduction being subject to a counteraction under Chapter 9. For example, Research and Development tax relief, which provide for additional relief for expenditure (that additional element of relief itself not being doubly deductible), are not prevented by the restricted use of a deduction under Chapter 9

However, if it is reasonable to suppose there is an ‘Illegitimate overseas deduction’ (see INTM557070 and INTM557075) then the deduction equal to that amount is denied entirely rather than restricted to use against dual inclusion income. In those circumstances any relief that relies on the existence of a deduction will not be available.