INTM561130 - INTM561130 - Hybrids: other provisions - adjustments in light of subsequent events: deduction from taxable total profits where an amount of ordinary income arises late

S259LA TIOPA 2010 applies where a deduction arising from a payment or quasi-payment is reduced by application of Chapters 3, 4, 7 and 8 and the only reason for the reduction is that the ordinary income arose to the payee outside the permitted period. If an amount of ordinary income arises in a later period, an amount equal to the amount of that ordinary income, but no more than the reduction of the allowable deduction, may be deducted in calculating the taxable profits of the payee for that later period.

This section applies where a deduction has been denied to a payer within the charge to corporation tax (the UK payer) because the relevant payment or quasi-payment gave rise to

  • a hybrid or otherwise impermissible deduction/non-inclusion mismatch under the rules in Chapter 3, see INTM551000
  • a hybrid transfer deduction/non-inclusion mismatch under the rules in Chapter 4, see INTM552000
  • a hybrid payee deduction/non-inclusion mismatch under the rules in Chapter 7, see INTM555000, or
  • a multinational payee deduction/non-inclusion mismatch under the rules in Chapter 8, see INTM556000

The section applies if

  • the only reason for the mismatch under these Chapters was that it was reasonable to suppose that the deduction exceeded the total ordinary income arising by reason of the payment or quasi-payment arising within the permitted taxable period, and
  • an amount of ordinary income arises later, outside the permitted taxable period, by reason of the payment or quasi-payment and for reasons unconnected to the application of Part6A or equivalent overseas rules

Adjustment

Where this section applies then an amount equal to the late income may be deducted from the payer’s total taxable profits in the accounting period within which the late period ends.

The deduction is recognised at step 2 in s4(2) CTA 2010. Therefore, it is not given in computing the amount within the computation of the company’s total profits for the period but is relieved against total profits after they have been computed. If there are insufficient total profits in that period, then the unusable balance of the deduction is carried forward to be treated as being relievable in the next subsequent period, and so on, until it can be so offset.

A consequence of granting relief in this manner is that the deduction does not retain its original character. For example, if the counteraction was against a trading deduction or a non-trade loan relationship debit, then it will not remain as such and therefore can neither create nor augment a trading loss or a non-trading deficit on loan relationships for that period. By extension, therefore, it will not be eligible for group relief or any other transfer of relief that is dependent on the character of the payment.

Exceptions

As indicated earlier, it will not be possible to set an amount of ordinary income against the adjusted deduction if the ordinary income arises only because of another counteraction by an overseas equivalent of Part 6A.

No deduction is available in the later period if one of the other rules within Part 6A would apply to counteract the relevant mismatch.

If the relevant receipt exceeds the amount counteracted, then this section does not apply to the excess.

The following examples illustrate the application of s259L.

Example: Hybrid payer deduction/non-inclusion mismatch

A Chapter 5 counteraction is applied to a UK hybrid payer, on the assumption that there would be a hybrid payer deduction/non-inclusion mismatch. This assumption was based on the fact that the payee jurisdiction would disregard the hybrid payer, and therefore no ordinary income would be recognised by the payee in that jurisdiction.

Subsequently, it transpires that the payee jurisdiction had not disregarded the hybrid payer, but in fact treated it as a separate taxable entity (because it did not meet the precise requirements of the relevant tax law in that jurisdiction). As a result, the payee did bring into account ordinary income which matched the relevant deduction claimed by the UK payer.

In these circumstances, a consequential adjustment under Chapter 12 would be appropriate, because the reasonable supposition which was made when a counteraction was applied under Chapter 5 would no longer be reasonable, given the actual treatment in the payee jurisdiction.