INTM552110 - Hybrids: hybrid transfers (Chapter 4): conditions to be satisfied: condition D - case 1

Case 1 - deductions exceed ordinary income

For case 1 the requirements are that the relevant deduction exceeds the total amounts of ordinary income arising by virtue of payments or quasi-payments for a permitted taxable period and all or part of that excess arises (s259DC(7) TIOPA 2010) because either:

  • the dual treatment condition is satisfied in respect of an arrangement under which a payment or quasi-payment is made, or
  • the payment or quasi-payment is a substitute payment

Where the mismatch arises for several reasons it will be treated as arising by reason of the dual treatment condition being satisfied or the payment/quasi-payment being a substitute payment, if it could arise for either of those reasons.

It does not matter if the excess could also have arisen for some other reason as well.

Where there is more than one payee, the case 1 mismatch is calculated by reference to the ordinary income arising to each payee, making the relevant assumptions (see below) as regards each payee.

The relevant assumptions

The assumptions are

  • if the payee is not within the charge to tax in a payee jurisdiction because of an exclusion, immunity, exemption or relief under that law, the exclusion, etc. is assumed not to apply
  • if a payment or quasi-payment is not chargeable to tax in a ‘payee jurisdiction’ because it is not made in connection with the payee’s business in that jurisdiction, it is assumed that it is made in connection with such a business
  • if the payee is not resident in any territory which imposes a tax charge or there is no territory where the payee is chargeable to tax as a result of carrying on business through a permanent establishment, then assume the payee is UK resident, and carries on a business in the UK

A payee jurisdiction is one in which the payee is resident for tax purposes, or has a permanent establishment – s259BB(9).

Where you are assuming that a payee is UK resident, and carrying on a business in the UK, the following UK tax provisions are disregarded for the purpose of s259DB(3)(b)

  • transfer pricing (Part 4 TIOPA 2010)
  • the hybrid and other mismatch rules (Part 6A TIOPA 2010)
  • the worldwide debt cap (Part 7 TIOPA 2010), and
  • the loan relationships unallowable purposes rules (s441 CTA 2009)

Permitted taxable period

The permitted taxable period (in which ordinary income arises to a payee) is defined in s259DD(2). It includes any period that begins before the end of 12 months after the end of the payer’s taxable period. This will include a coincident period or an earlier period.

Further, if it is just and reasonable that ordinary income might arise in a later period rather than earlier, the permitted taxable period will include that later period.

This is intended to ensure that mismatches attributable entirely to timing or accounting differences are not brought within the scope of the hybrid and other mismatch rules. There is further comment on the permitted taxable period in the context of financial instruments at INTM551150.