Corporation Tax: minor changes to the hybrid and other mismatches regime - technical note
Published 5 December 2016
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Introduction
The hybrid and other mismatches regime was introduced by Finance Act 2016. Schedule 10 of FA 2016 inserted Part 6A (Hybrids and Other Mismatches) into the Taxation (International and Other Provisions) Act 2010 (TIOPA 2010).
As announced at Autumn Statement 2016, the government intends to make 2 minor changes to the hybrid mismatch regime. These changes will be introduced in Finance Bill 2017, but the changes will be effective from 1 January 2017 – the commencement date of the hybrid mismatch regime. These changes are both relieving provisions and will enable the hybrid mismatch rules to operate as intended.
In summary, the first of the proposed changes will clarify the treatment of certain mismatches relating to amortisation deductions. The second will reduce the administrative burden in relation to claims for timing mismatches.
The first change relates to the treatment of deductions for amortisation. The legislation refers to deductions which fall within the scope of the hybrid mismatch rules as ‘relevant deductions’. The change set out in this note will ensure that amortisation is only treated as a relevant deduction in certain circumstances.
The second change relates to the mechanism by which taxpayers can make a claim for mismatches which unwind within a limited time period to be disregarded. The legislation refers to such periods as ‘permitted periods’. The change set out in this note will remove the need for formal claims to be made in certain circumstances.
Mark Bryan
HM Revenue and Customs
CTIS
Mail station A, 3rd Floor
100 Parliament Street
London
SW1A 2BQ
Email: hybrids.mailbox@hmrc.gsi.gov.uk
Chapter 1- treatment of amortisation deductions
The hybrid mismatch rules operate by identifying different types of mismatches, and applying suitable counteractions to each mismatch. The legislation is structured so that each type of mismatch is dealt with under a separate chapter.
As currently drafted, amortisation would be treated as a ‘relevant deduction’ for the purposes of all chapters. A relevant deduction is defined in section 259BB as ‘an amount (which) may be deducted from the payer’s income … for the purposes of calculating a payer’s taxable profits.’ In order for the rules to apply, there has to be a payment in relation to which the amount may be deducted. With regard to amortisation, such tax deductions are given in relation to payments for the acquisition of certain assets.
The legislation will be amended so that deductions for amortisation are no longer treated as ‘relevant deductions’ for the purposes of the following chapters: Chapter 5 (hybrid payer deduction/non-inclusion cases); Chapter 6 (payer deduction/non-inclusion cases involving permanent establishments); Chapter 7 (hybrid payee deduction/non-inclusion cases) and Chapter 8 (payee deduction/non-inclusion cases involving permanent establishments).
Amortisation deductions will remain relevant deductions for the purposes of the rest of the hybrid mismatch regime.
Chapter 2- permitted period claims
The hybrid mismatch regime includes provisions which allow mismatches to be disregarded if amounts are brought into account within a certain time period. This allows for mismatches which only exist for a short period of time to be excluded from the scope of the rules.
The primary rule refers to amounts being brought into account in a period which begins less than 12 months after the end of the period in which the relevant payment was made. In the event of an amount being brought into account in a later period, the legislation allows for a claim to be made in relation to amounts brought into account in that later period.
With regard to Chapters 3 (hybrid and other mismatches from financial instruments) and 4 (hybrid transfer deduction/non-inclusion mismatches), this claim requirement could lead to a very high number of individual claims, due to the large volume of financial instruments that are likely to fall within the scope of the hybrid mismatch rules. In order to reduce the compliance burden in relation to the rules covering financial instruments, the requirement to make a formal claim for each mismatch involving a financial instrument will be removed.
This change will require an amendment to the legislation in Chapters 3 and 4 of the hybrid mismatch rules. Specifically, the requirement to make a formal claim set out in section 259CC(2)(b)(i) and section 259DD(2)(b)(i) will be removed.
It is not considered that changes will be required in respect of the other chapters of Part 6A, where the claim mechanisms will remain as currently drafted.