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HMRC internal manual

International Manual

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Arbitrage: legislation and principles - qualifying schemes for deductions cases: schemes involving hybrid instruments: general

A scheme may also be a qualifying scheme if an effect equivalent to the use of a hybrid entity is achieved through the use of a hybrid instrument and/or transactions between connected persons.

There are four categories of hybrid instrument whose inclusion in a scheme cause it to be a qualifying scheme whether or not there is any connection between the scheme participants, which are described below:

Type 1 - Instruments of alterable character

This refers to an instrument which allows one or more of the parties to make an election that alters whether income or gains derived from the instrument are taken into account as income or capital for tax purposes, or are ignored altogether (S237 TIOPA 2010).

Type 2 - Shares subject to conversion

These are shares that may be converted to securities on the occurrence of some event, which at the date of issue or the date that the conversion right is created the holding company can reasonably expect to occur (S238 TIOPA 2010).

Type 3 - Securities subject to conversion

These are securities that may be converted to shares on the occurrence of some event, which at the date of issue, or the date that the conversion right is created, the holding company can reasonably expect to occur (S239 TIOPA 2010).

Type 4 - Debt instruments treated as equity

These are instruments that are treated as loan relationships for UK corporation tax purposes, but are (to any extent and by any company) treated as equity in the issuing company in accordance with generally accepted accounting practice (S240 TIOPA 2010).