CFM93045 - Debt cap:interaction with other rules:Hybrid Mismatch

This guidance applies to worldwide group periods of account ending before or straddling 1 April 2017.

TIOPA10/S259CA-259DG {#}

For company accounting periods of account beginning on or after 1 January 2017, the “Tax Arbitrage” provisions of TIOPA10/PT6 were superseded by the “Hybrid and Other Mismatch” provisions of PT6A. It follows that there will only be a limited degree of overlap between the debt cap and the hybrid mismatch rules, mainly in worldwide group period of account that straddle 1 April 2017 in which both the debt cap and Corporate Interest Restriction provisions of TIOPA/PT10 can have effect.

TIOPA10/S259CB(6)(e) and S259DC(5)(d) provide that in applying the hybrid mismatch rules to hybrid and other mismatches from financial instruments, or hybrid transfers (for example, repos), the debt cap is to be disregarded. Accordingly, the hybrid and other mismatch rules take priority over the debt cap and the debt cap is applied to financing expense amounts and financing income amounts, as adjusted by TIOPA10/PT6. This approach is consistent with that under the tax arbitrage rules.

For completeness, note that the interaction between the hybrid and other mismatch provisions and the Corporate Interest Restriction, in TIOPA10/PT10, which replaces the debt cap with effect from 1 April 2017, follows the same pattern. This is achieved by amending the reference to TIOPA10/PT7 in S259CB(6)(e) and S259DC(5)(d) to a reference to TIOPA10/PT10 -see F(No.2)A17/SCH5/PARAS18-19.