The spring Budget included details of plans to make two minor changes to the hybrid mismatch regime, which are intended to ease the compliance burden in relation to certain claims and ensure that amortisation deductions are not within scope of these rules
The changes were effective from 1 January 2017 when the hybrid and other mismatch regime came into effect, and HMRC says they form part of its strategy to tackle aggressive tax planning, typically involving multinational groups, where either one party gets a tax deduction for a payment while the other party does not pay tax on the receipt, or where there is more than one deduction for the same expense.
Legislation in Finance Bill 2017 will make the changes, which were first announced in a technical note at Autumn Statement 2016, and have been subject to discussions with stakeholders.
The first change removes the need to make formal claim in relation to the permitted time period rules in chapter 3 and 4 of Part 6A Taxation (International and Other Provisions) Act 2010 (TIOPA 2010).
The current law is set out in section 259CC(2)(b) and section 259DD(2)(b) respectively. These subsections require a formal claim to be made in relation to permitted time periods which commence more than 12 months after the end of the accounting period in which a relevant deduction has been claimed.
The current law in relation to relevant deductions is set out in section 259BB(1)(b), and simply defines a relevant deduction as an amount which may be deducted from the payer’s income for a taxable period.
Under the proposed revisions the need for a formal claim under chapter 3, which deals with hybrid and other mismatches from financial instruments, is removed by amending section 259CC(2)(b) and the need for a formal claim under chapter 4, which deals with hybrid transfer deduction/non-inclusion mismatches, is removed by amending section 259DD(2)(b).
The second change provides that deductions for amortisation are not treated as relevant deductions for the purposes of chapter 5 to 8 of Part 6A.
Chapters 5 to 8 of Part 6A TIOPA 2010 are amended by inserting a new sub-section into each chapter which disregards deductions for amortisation when considering whether a relevant deduction has caused a hybrid or other mismatch.
Chapter 11 of Part 6A of TIOPA is also amended by inserting a new sub-section which disregards deductions for amortisation when identifying permanent establishment (PE) deductions. The amortisation deductions which can be disregarded are defined by reference to the UK intangible fixed asset regime in Corporation Tax Act 2009 (CTA 2009), and specifically to debits brought into account under section 729 or section 731 CTA 2009 - or deductions in other territories which are equivalent to those UK deductions.
HMRC says the measure ensures that the regime operates as intended. The removal of the need to make a formal claim in relation to financial instruments is intended to reduce the compliance burden for taxpayers, given the high volume of transactions in financial instruments.
The changes which ensure that amortisation is not treated as a relevant deduction ensure that, in line with the OECD’s Base Erosion and Profit Sharing (BEPS) action 2 recommendations, amortisation deductions are not treated as giving rise to a hybrid or other mismatch in relation to chapters 5 to 8.
HMRC’s policy paper, Corporation Tax: hybrid and other mismatches - permitted taxable periods of payees and deductions for amortisation is here.
