Corporation Tax: Hybrid and other mismatches regime, two minor changes
Published 29 October 2018
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Who is likely to be affected
Large multinational groups with UK parent or subsidiary companies involved in cross-border or domestic transactions involving a mismatch in the tax treatment within the UK or between the UK and another jurisdiction.
General description of the measure
Council Directive (EU) 2017/952 amended EU Directive 2016/1164 (Anti-Tax Avoidance Directive (ATAD)) by introducing detailed rules for the treatment of hybrid mismatches. The changes detailed below ensure that the UK hybrid and other mismatch rules are fully compliant with ATAD.
Policy objective
The proposed changes amend the UK’s hybrid and other mismatch legislation in respect of certain mismatches involving permanent establishments and the treatment of regulatory capital. These changes will comply with ATAD, as amended by Council Directive (EU) 2017/952. Articles 2, 9, 9a and 9b of ATAD contain detailed provisions in relation to hybrid mismatches.
Background to the measure
Council Directive (EU) 2016/1164 (ATAD) was adopted on 12 July 2016. Council Directive (EU) 2017/952 was adopted on 27 May 2017, and amended ATAD. The implementation date for the majority of the ATAD minimum standards in relation to hybrid mismatches is 1 January 2020.
The UK already has comprehensive hybrid mismatch rules which were introduced by Finance Act 2016 and came into effect from 1 January 2017. These rules meet virtually all the minimum standards set by ATAD.
However, 2 changes are required to ensure that the UK rules are fully aligned with the ATAD requirements with an implementation date of 1 January 2020. These changes relate to the minimum standards set out in article 9 of ATAD.
Article 9(5) of ATAD contains specific requirements in relation to the treatment of certain mismatches involving permanent establishments.
Article 9(4) of ATAD contains specific requirements in relation to the exemption of regulatory capital.
For completeness, ATAD also contains requirements in relation to the treatment of certain ‘reverse hybrids’ in Article 9a. As the implementation date for those requirements is 1 January 2022, the UK will consider any further changes to legislation that need to be made in respect of Article 9a in due course.
These minor changes were published in draft for consultation on 6 July 2018. This tax Information and Impact Note supersedes the Tax Information and Impact Note issued on 6 July 2018 under the title “Hybrid and Other mismatches Anti-Tax Avoidance Directive”.
On 23 June 2016, the EU referendum took place and the people of the United Kingdom voted to leave the European Union. Until exit negotiations are concluded, the UK remains a full member of the European Union and all the rights and obligations of EU membership remain in force. During this period the government will continue to negotiate, implement and apply EU legislation. The outcome of these negotiations will determine what arrangements apply in relation to EU legislation in future once the UK has left the EU.
Detailed proposal
Operative date
The change in relation to disregarded permanent establishments included in this measure have effect from 1 January 2020. The regulatory power in relation to the treatment of regulatory capital included in this measure will have effect from 1 January 2019.
Current law
The UK hybrid and other mismatches regime is contained in Part 6A of Taxation (International and Other Provisions) Act (TIOPA) 2010.
Chapter 8 of Part 6A contains rules in relation to certain mismatches involving permanent establishments.
Chapter 14 of Part 6A contains definitions for the purposes of the Hybrid and other mismatches regime, including a definition of financial instrument in Section 259N(3)(b) that specifically excludes regulatory capital as defined by Statutory Instrument 2013/3209 from the definition of financial instrument. Statutory Instrument 2013/3209 is due to be repealed with effect from 1 January 2019.
Proposed revisions
Legislation will be introduced in Finance Bill 2018-19.
The first change relates to the treatment of certain mismatches involving permanent establishments. Section 259HA and Section 259HC in Chapter 8 will be amended to include specific provisions in relation to cases where a permanent establishment of a company is recognised by the jurisdiction where a company is resident, but not recognised by the jurisdiction where the permanent establishment is located. Such disregarded permanent establishments will be brought within the scope of the rules.
The second change relates to the treatment of regulatory capital. The exemption for certain regulatory capital provided by Section 259N(3)(b) will be amended to enable regulations to be made which can provide a revised definition of regulatory capital that falls outside the scope of the rules. This regulatory power will enable the hybrid mismatch rules in relation to regulatory capital to take into account the specific requirements set out by Article 9(4) of ATAD and provide a revised definition of exempt regulatory capital following the repeal of Statutory Instrument 2013/3209. The measure also provides that the current exemption for certain regulatory capital will remain in place until such time as the new regulations come into force.
Summary of impacts
Exchequer impact (£m)
| 2018 to 2019 | 2019 to 2020 | 2020 to 2021 | 2021 to 2022 | 2022 to 2023 | 2023 to 2024 |
|---|---|---|---|---|---|
| - | negligible | negligible | negligible | negligible | negligible |
This measure is expected to have negligible impact on the Exchequer.
Economic impact
This measure is not expected to have any significant economic impacts.
Impact on individuals, households and families
This measure has no impact on individuals, and households as it only affects companies.
The measure in not expected to impact on family formation, stability or breakdown.
Equalities impacts
This measure does not have an impact on groups sharing protected characteristics.
Impact on business including civil society organisations
There will be a limited impact on business insofar as these minor changes to the Hybrid and other mismatch rules in Part 6A of TIOPA will require businesses to assess whether certain mismatches are within scope of the legislation. This measure will impact particularly on businesses who have disregarded permanent establishments or who are required to hold regulatory capital. The impact on administrative burdens is expected to be negligible. One-off costs include familiarisation with the new rules. On-going costs are expected to include specific additional accounting and reporting adjustments to ensure compliance with the new rules. There is no impact on civil society organisations.
Operational impact (£m) (HMRC or other)
There will be negligible impact on HMRC for this change.
Other impacts
Other impacts have been considered and none have been identified.
Monitoring and evaluation
The measure will be kept under review through communication with affected taxpayer groups.
Further advice
If you have any questions about these changes, contact Mark Bryan on Telephone: 03000 585607 or email: mark.bryan@hmrc.gsi.gov.uk.