INTM557070 - Hybrids: hybrid entity double deduction mismatches (Chapter 9): counteraction - investor in hybrid entity

The counteraction where an investor in a hybrid entity is within the charge to UK corporation tax is set out at s259IB.

An investor may not deduct the hybrid entity double deduction amount unless it is deducted from dual inclusion income of the investor for that period.

Where the amount deducted by the investor exceeds the dual inclusion income in the period, the excess may be carried forward to use against dual inclusion income of the investor in future accounting periods.

Illegitimate overseas deduction

The amount of the double deduction that may be set against dual inclusion income of the investor is permanently reduced by the amount of any illegitimate overseas deduction.

An illegitimate overseas deduction arises where it is reasonable to suppose that all or part of the hybrid entity double deduction amount is, in substance

  • deducted under the law of a territory outside the UK
  • from the income of any person for a taxable period, and
  • the income from which it is deducted is not dual inclusion income of the investor for an accounting period

This may occur, for example, where the double deduction creates a loss for the hybrid entity, and that loss is surrendered under a group relief regime.

The illegitimate overseas deduction is treated as if it had already been allowed in a previous accounting period. It will not form part of any unused hybrid entity double deduction amount carried forward.

Dual inclusion income

Dual inclusion income of the investor is the amount of income arising during an accounting period that is ordinary income of both

  • the investor for that period, and
  • the hybrid entity for a permitted taxable period for the purposes of any tax charged outside the UK

Ordinary income

Ordinary income means income that is brought into account when calculating taxable profits on which tax is charged. The full definition (including restrictions on what may be regarded as ordinary income and where specific reliefs may be treated as reducing the amount of ordinary income) is in s259BC, and the concept is discussed further at INTM550560.

Permitted taxable period

A taxable period of a hybrid entity is a permitted taxable period if it

  • begins at any time before the end of 12 months after the end of the accounting period within which the amount is deducted by the investor, or
  • begins in a later period if a claim has been made and it is just and reasonable that the ordinary income arises in that period instead of the earlier period