INTM553030 - Hybrids: hybrid payer (Chapter 5): conditions to be satisfied: condition A

Condition A of s259EA TIOPA 2010 requires there to be a payment or quasi-payment made under, or in connection with, an arrangement.

Definitions of the key terms for this condition are at s259BB.

The phrase ‘in connection with’ is not defined and takes its ordinary meaning – a link between, relationship with or reference to the arrangement.

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

The payer is the person from whom the transfer is made. A payee is any person to whom

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

An amount is a quasi-payment if

  • an allowable deduction would arise in calculating the taxable profits of the payer, if the hybrid and other mismatch rules in 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 arising to one or more persons if certain relevant assumptions to apply

Relevant assumptions

The relevant assumptions when deciding if the circumstances giving rise to the deduction may reasonably be expected to result in ordinary income are

  • if there is any question of whether an entity is separate from the payer, that is to be determined by the law of the payer jurisdiction (this will address situations where the payee jurisdiction does not recognise the payee as a separate entity)
  • any payee or potential payee is assumed to have adopted the same accounting approach to those circumstances as the payer
  • any payee or potential payee is assumed to be resident for tax purposes in the payer jurisdiction, and
  • any payee or potential payee is assumed to be carrying on a business in the payer jurisdiction and the circumstances giving rise to the payer’s deduction arise in connection with that business

There is nothing to prevent an amount satisfying the definitions of being both a payment and a quasi-payment.

The payer jurisdiction is the jurisdiction in which the deduction is available for tax purposes.

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 include economic rights, in substance, existing between the payer and the payee(s).

Condition A also requires that the payment or quasi-payment be made under an arrangement. S259NF contains the definition of an arrangement for the purposes of this legislation, and it includes any agreement, understanding, scheme, transaction, or series of transactions (whether legally enforceable or not).