INTM551110 - Hybrids: financial instruments (Chapter 3): conditions to be satisfied: condition D

Condition D is satisfied where one of the following applies

  • a quasi-payment is made where the payer is also the payee, or
  • the payer and a payee are related at any time from when the arrangement in connection with the financial instrument is made, to the last day of the payment period, or
  • the financial instrument or an arrangement connected with it is a structured arrangement

A payer may also be a payee in respect of a quasi-payment where the payee

  • is an entity that is not considered to be a separate person from the payer, for example the branch of a company, and
  • is an entity that is a separate person from the payer for tax purposes in the payer’s jurisdiction, and
  • it would be reasonable to expect that entity to have an amount of ordinary income arising as a result of the circumstances giving rise to the quasi-payment

Related persons are defined at s259NC. More detailed guidance on related persons is at INTM550610, but in broad terms a payer and a payee are related on any day that they are

  • in the same control group (as defined at s259NB), or
  • one holds a 25% investment in the other, or
  • a third person holds a 25% investment in both entities

See INTM559230 where previously unrelated parties become related solely as a consequence of the financial instrument.

Structured arrangements

A financial instrument or arrangement connected with it is a structured arrangement if

  • it is designed to secure a relevant mismatch within Case 1 or Case 2, or
  • under the terms of the instrument or arrangement the economic benefit of the mismatch is shared between the parties to that instrument or arrangement, or
  • the terms of the instrument or arrangement otherwise reflect that the mismatch was expected to arise

It is likely, but not essential, that all parties would be aware that the instrument or arrangement may create a relevant mismatch whether by virtue of its structure, terms, conditions or simply that the price reflects that benefit.

Where it is designed to achieve the mismatch, it is irrelevant whether it has also been designed to achieve commercial or other objectives.

Where it can be shown that the pricing resulting in any tax saving was derived from factors unconnected to the possible mismatch then there will not be a structured arrangement, unless it is reasonable to suppose that it was still designed to secure it, irrespective of whether both parties intended to share in that saving.

If a product is targeted at a subset of taxpayers who are likely to benefit from such a mismatch, then irrespective of whether the product is also more widely available to other taxpayers, who would not benefit from the mismatch, the arrangement or instrument would be caught.

For further examples of structured arrangements, see INTM551115.