CFM72390 - Other tax rules on corporate finance: securitisation: periods beginning on or after 1 January 2007: the regulations: the note-issuing company: ‘independent persons’

Independent persons

The securities that represent the capital market investment must be issued wholly or mainly to independent persons.

‘Independent persons’ means persons not connected with the issuing company. ‘Wholly or mainly’ takes its normal meaning as more than 50% by value of the securities in question. The value of the securities will normally be determined for this purpose by reference to the carrying value of the related liabilities in the accounts of the issuer, measured in accordance with generally accepted accounting practice as defined in CTA10/S1127.

Connection is established by applying CTA10/S1122 and S1123. Connection is tested by reference to control of a company’s affairs. Control is determined using an amended version of the test in CTA10/S1124(2), by reference to control of a corporate’s affairs through the holding of shares, possession of voting rights, or powers given by articles of association, but not by other documents regulating that or any other company. For additional guidance on the application of the test in CTA10/1124 see CTM80175.

Pre-2022 Arrangements

The test of independence was changed in 2022 to make it simpler and easier to apply.

Prior to 17 May 2022 the test of control was based on CTA10/S 450 and S451 but excluding participators who are loan creditors. The new control test does not apply to any securities that were issued as part of a capital market arrangement entered into by the issuing company before 17 May 2022.

The independent persons test can be taken as applying by reference to all securities that are issued as part of a single capital market arrangement, rather than to each individual bond or class of bonds. If a number of different capital market instruments are issued within a reasonable period of one another (normally 20 days), in substance as part of a single issuance, it will be accepted that the independent persons test is to be applied to all such capital market investments in aggregate.

The ‘independent persons’ test will not be failed where the issue is made ultimately to independent persons, even though a non-independent person may act as an intermediary, provided the non-independent person had (whether contractually or purely as a commercial matter) no freedom to retain the notes in question, or where the intermediary is acting as an underwriter in the normal course of its business. For example, the notes may initially be subscribed for by the lead manager and then on-sold, in circumstances where the lead manager is connected with the issuer. Or due to market conditions, or particularly complex transactions or arrangements, there may be a subscription by a company in the same group as the issuer, with the intention of transferring the bonds to independent investors as soon as market conditions allow.

Treasury notes

In some cases, part of an issuance of bonds is purchased on issue by a trustee (either directly or via an underwriter) who acquires the bonds to hold them as nominee for the issuer. The arrangement is designed to enable the issuer to instruct the nominee to sell bonds from time to time to third party purchasers and account to the issuer for the proceeds. Bonds held by a nominee under this type of arrangement are commonly called ‘treasury notes’.

This is not comparable to cases where there is an issuance of bonds in instalments, as part of a single funding transaction. Rather, the purpose of ‘treasury note’ arrangements is normally to put in place a framework to allow the treasury notes to be (in effect) ‘issued’ to third parties over an extended period, without any future sale of the notes being specifically agreed at the outset. Where this is the case, for the purposes of the ‘independent persons’ test:

  • the treasury notes will not be treated as being ‘issued’ at the point where they are initially acquired by the trustee for the issuer (whether directly or via an underwriter)
  • on each occasion when any treasury notes are subsequently sold by the trustee to third parties on the instructions of the issuer, the notes in question will be treated as being ‘issued’ to the third party purchasers at that stage.