Hybrid and other mismatches: the continuation of regulatory capital exemption
Updated 10 November 2022
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Who is likely to be affected
Banks who issue hybrid capital instruments to overseas associates.
General description of the measure
The regulations will ensure the continuation of an exemption from counteraction under the hybrid and other mismatches legislation in Part 6A of the Taxation (International and Other Provisions) Act 2010 (TIOPA 2010). The exemption applies to certain regulatory capital instruments issued by banks to their overseas associates.
Policy objective
The measure will ensure that interest paid on hybrid instruments issued by banks to meet regulatory requirements should remain deductible, subject to meeting conditions set out in existing tax regulations.
Background to the measure
The hybrid and other mismatches rules at Part 6A of TIOPA 2010 are an anti-avoidance regime that seeks to counteract mismatches in the tax treatment of instruments and structures across jurisdictions. Broadly, where payments give rise to deductions without a corresponding taxable receipt, the hybrid and other mismatches rules can apply to either deny the deduction or bring the receipt into charge.
However, there remains an overriding policy objective that interest paid on hybrid regulatory capital instruments should be deductible. Specifically, when banks issue hybrid regulatory capital instruments that include some features which may mean there is a mismatch in tax treatment across jurisdictions, it is not intended that these should be counteracted by the hybrid and other mismatches rules. Legislation is currently in place to exempt certain hybrid capital and debt instruments issued by banks to their overseas associates from counteraction under these rules. This position is supported by the Organisation for Economic Co-operation and Development’s Base Erosion and Profit Shifting (BEPS) Project recommendations, which give countries freedom in their policy choices as to whether their hybrid and other mismatches rules should be applied to tax mismatches that arise on intra-group hybrid regulatory capital.
An amendment was made to the exemption legislation in 2019 to ensure that it met the detailed requirements of the EU Anti-Tax Avoidance Directive (ATAD). In accordance with this Directive, the 2019 legislation included a sunset clause so that the exemption for regulatory capital would cease after 31 December 2022.
These regulations will remove the sunset clause (such as, the expiry of the exemption after 31 December 2022) through secondary legislation and allow the exemption to continue to apply from 1 January 2023.
Draft regulations were subject to consultation from 19 May 2022 to 30 June 2022. A small number of responses were received welcoming the draft regulations. No changes were made to the draft regulations.
Detailed proposal
Operative date
The measure will have effect from 1 January 2023.
Current law
The Hybrid and Other Mismatches (Financial Instruments: Excluded Instruments) Regulations 2019 (SI 2019/1345) specify the types of regulatory capital instruments issued by banks that are exempt from the hybrid and other mismatches rules in Part 6A of TIOPA 2010. This exemption falls away from 1 January 2023.
Proposed revisions
This measure will amend SI 2019/1345 to remove the time limit of 1 January 2023 in regulation 1(2)(a) and (b).
This measure will also remove regulation 1(4) from SI 2019/1345 as regulation 1(4) will be redundant once the time limit is removed.
Summary of impacts
Exchequer impact (£million)
| 2022 to 2023 | 2023 to 2024 | 2024 to 2025 | 2025 to 2026 | 2026 to 2027 | 2027 to 2028 |
|---|---|---|---|---|---|
| Nil | Nil | Nil | Nil | Nil | Nil |
This measure is not expected to have an Exchequer impact.
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 as it only affects banks. This measure is not expected to impact on family formation, stability or breakdown.
Equalities impacts
It is not anticipated that there will be impacts for those in groups sharing protected characteristics.
Impact on business including civil society organisations
This measure is expected to have a negligible business administration impact on a small number of banks potentially affected by the hybrid mismatches legislation. One-off costs for these businesses will include familiarisation with the new rules. There are not expected to be any continuing costs.
Customer experience is expected to stay broadly the same because the changes made by these regulations do not alter how banks interact with HMRC.
This measure is not expected to impact on civil society organisations.
Operational impact (£million) (HMRC or other)
There are no financial consequences for HMRC.
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 this change, contact the Financial Services Policy Team. Email: financialservicesbai@hmrc.gov.uk.
Declaration
Andrew Griffith MP, Economic Secretary to the Treasury, has read this tax information and impact note and is satisfied that, given the available evidence, it represents a reasonable view of the likely costs, benefits and impacts of the measure.