INTM553080 - Hybrids: hybrid payer (Chapter 5): extent of the mismatch

If conditions A to E are met, the next step is to establish the extent of any hybrid payer deduction/non-inclusion mismatch for the purposes of Chapter 5, Part 6A of TIOPA 2010.

S259EB defines a hybrid payer deduction/non-inclusion mismatch in relation to a payment or quasi-payment as a mismatch where

  • there is an allowable deduction for the hybrid payer that exceeds the sum of ordinary income arising to the payee(s), and
  • all or part of that excess arises because the hybrid payer is a hybrid entity

The legislation asks whether, if the payer had not been a hybrid entity, would the mismatch between the ordinary income of the payee and the allowable deduction of the payer have been reduced or eliminated? If so, to that extent then it is a hybrid payer deduction/non-inclusion mismatch.

The amount of hybrid payer deduction/non-inclusion mismatch is the amount of the excess that arises because the hybrid payer is a hybrid entity. In determining whether the mismatch arises from hybridity, it does not matter whether the excess arises for some other reason as well, and this is dealt with by a counter-factual test which asks whether the excess could arise when making the following assumptions

  • If the payee was not within the charge to tax because of an exclusion, immunity, exemption or relief, assume that the payee did not benefit from that exclusion, immunity, exemption or relief, and establish whether a mismatch would still have arisen.

(Examples of such entities are exempted charitable corporations or companies benefitting from sovereign exemption.)

  • If, on making the assumptions, the mismatch would no longer arise, then the mismatch arises because of the exemption. If, however, the mismatch still exists, the mismatch arises from the hybridity of the payer.
  • If the payment or quasi-payment was not made in connection with a business carried on by the payee in the relevant jurisdiction, then assume it was made in connection with such a business and ask whether a mismatch would still have arisen.

(For example, some jurisdictions do not tax residents on receipts which arise in connection with a business carried outside that jurisdiction.)

  • If, on making the assumptions, the mismatch would no longer arise, then the mismatch arises because of the territorial nature of the tax regime of the payee jurisdiction. If, however, the mismatch still exists, the mismatch arises from the hybridity of the payer.

There is no hybrid payer deduction/non-inclusion mismatch where

  • there is no excess, or
  • there is an excess, but none of it arises because the hybrid payer is a hybrid entity, or
  • the relevant deduction is

(a) a debit in respect of amortisation brought into account under s.729 or 731 CTA 2009 or

(b) an amount deductible in respect of amortisation under an equivalent law of a territory outside the UK

These specific pieces of legislation relate to debits in respect of intangible fixed assets for writing down on accounting basis. But note that the exemption does not

Qualifying Institutional Investors

Finance Act 2021 introduced rules into Part 6A TIOPA 2010 for Qualifying Institutional Investors (QIIs), which are defined in Paragraph 30A of Schedule TAC to TCGA 1992. See CG53012.

From the date of Royal Assent of the Finance Act 2021, no excess is taken to have arisen by reason of the hybrid payer being a hybrid entity if the excess is attributable to a QII that is based in a territory that treats the income or profits of the hybrid entity as the income or profits of the QII, or if the QII is based in a territory that does not regard the hybrid entity as a distinct and separate person to the QII.

A QII is based in a territory if it is resident there for tax purposes or, if it is not resident anywhere for tax purposes, if it is established in that territory. This amendment means that where the hybrid payer has been checked open for US tax purposes and makes a payment to a US based QII which part owns it, no counteraction under ch.5 will arise. Prior to the change, the non-taxability of the QII’s receipt would effectively have been attributed to the hybridity of the payer which in turn meant that the QII would not be regarded as having received any income in respect of the payment. The amendment changes this treatment in recognition of the fact that the payment would have been untaxed even absent the payer’s hybridity by reason of the QII’s tax exempt status.

Furthermore, Finance Act 2021 introduced s259BC(8A) TIOPA 2010 which ensures that income is treated as ordinary income if it would have been brought into account for the purposes of calculating taxable profits but for the fact that person is a QII.