INTM552080 - Hybrids: hybrid transfers (Chapter 4): conditions to be satisfied: condition B

Condition B is met if a payment or quasi-payment is made under or in connection with the hybrid transfer arrangement itself, or the underlying instrument.

Payment

A payment is any transfer of money or money’s worth in relation to which an allowable deduction arises in calculating the taxable profits of the payer, if Part 6A (or a non-UK equivalent of Part 6A) did not apply.

Payer and payee

The payer is the person who makes the transfer. A payee is any person to whom

  • a transfer of money or money’s worth is made, or
  • an amount of ordinary income arises

Quasi-payment

An amount is a quasi-payment if

  • an allowable deduction would arise in calculating the taxable profits of the payer, if Part 6A (or a non-UK equivalent of Part 6A) did not apply, and
  • the circumstances giving rise to the deduction may reasonably be expected to result in ordinary income of one or more persons were certain assumptions to apply

See INTM550540 for more detail on payments and quasi-payments.

Deductions deemed to arise for tax purposes under the law of the payer jurisdiction are not quasi-payments where the circumstances giving rise to the deduction do not involve economic rights between the payer and a payee.

Where the dual treatment condition is satisfied in respect of funding expense mismatches (see INTM552060) the mismatch will normally concern a quasi-payment and the mismatch will be the amount of the relevant deduction (see INTM550540) for the funding cost under the hybrid transfer arrangement.

The quasi-payment may reflect the effects of a number of payments, for example the sale and repurchase costs of the security and any interest, dividend and substitute payments received, paid, or forgone.

Example

  • An in-substance lender, Co 1, sells securities for £100m to Co 2, its counterparty, and agrees to buy back the securities in 4 months’ time for £101m
  • Co 2 is permitted to retain any dividend or interest payment received while it holds the security. This amount is deducted from the repurchase price
  • A dividend of £4m is received by the counterparty, Co 2, and so the repurchase price is reduced to £97m
  • Co 1’s jurisdiction follows economic substance and allows a deduction of £1m for the funding cost under the repo and taxes (or exempts) the payment on the underlying security as if the security had not been transferred

If Co 2’s jurisdiction mirrors this treatment, by taxing a financing return of £1m and ignoring the dividend or interest on the security, the dual treatment condition is not satisfied.

But, if Co 2’s jurisdiction follows legal form, for instance by recognising a capital loss of £3m (purchase price £100m, sale price £97m) and treating the actual payment as if it were income of Co 2 (for example, a dividend benefitting from a portfolio dividend exemption), the dual treatment condition is satisfied in respect of a quasi-payment of £1m, being Co 1’s funding cost under the arrangement.

The above example is similar to the example at INTM552510.

There may be a question as to whether fully taxed ordinary income arises to the counterparty that corresponds to the funding expense deducted. In the case of such funding arrangements, once the funding cost is identified, it is not necessary to further test the individual components of the overall transfer arrangements.

In the case of mismatches arising from substitute payments (see INTM552070), the amount in point is normally a payment being the substitute payment. Exceptionally, there may be a quasi-payment where, as described above, some other non-cash benefit is given in respect of a substitute payment.