INTM551160 - Hybrids: financial instruments (Chapter 3): counteraction

Action to counter the hybrid or other impermissible mismatch (arising from either case 1 or case 2) depends on whether the payer, payee or both are within the charge to corporation tax in the UK.

Primary response

If the payer is within the charge to corporation tax in the UK for the payment period, s259CD applies to reduce the payer’s claim for a deduction from income by an amount equal to the mismatch.

A payment period is the taxable period of the payer in which the deduction for the payment or quasi-payment is made.

Secondary response

If a payee is within the charge to corporation tax in the UK, s259CE may apply to treat a relevant amount of the mismatch as income of the payee in the counteraction period.

The counteraction at s259CE applies where it is reasonable to suppose that

  • s259CD or an equivalent non-UK provision does not apply, or
  • an equivalent non-UK provision to s259CD applies but it does not fully counteract the mismatch

The relevant amount of the mismatch to be included as income of the payee is an amount equal to the hybrid or impermissible mismatch where s259CD or a non-UK equivalent provision do not apply.

The relevant amount of the mismatch to be included as income of the payee where a non-UK provision equivalent to s259CD applies but does not fully counteract the mismatch is the lesser of

  • the amount by which the mismatch exceeds the deduction allowed, and
  • the amount of the deduction the payer may deduct after any counteraction outside the UK

If there is more than one payee, the relevant amount is apportioned on a just and reasonable basis, taking into account

  • any profit sharing arrangements between some or all of the payees
  • payees to whom any under-taxed amounts arise, and
  • payees who would have been expected to have ordinary income as a result of the payment or quasi-payment, but did not have that ordinary income

The counteraction period is

  • an accounting period of the payee that coincides with the payment period, or, failing that
  • the first accounting period of the payee falling wholly or partly in the payment period