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Hybrid and other mismatches: HMRC publish updated draft guidance

Hybrid and other mismatches: HMRC publish updated

This article highlights the main amendments to HMRC’s updated draft guidance on the hybrid mismatch rules.


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On 31 March 2017 HMRC published their updated draft hybrid mismatch guidance. The amendments deal with key themes identified from representations received from stakeholders since the initial draft was released in December 2016 and attempt to correct any inconsistencies. HMRC acknowledge that the development of the guidance is an ongoing progress and further engagement with respondents is required before it is finalised.

The updates set out HMRC’s view on the following issues as follows:

Foreign tax

Where a territory imposes income tax at a national level (e.g. US Federal Tax), State taxes imposed in that territory will not constitute ‘foreign taxes’. This is on the basis that a non-UK tax corresponds to UK tax on income where it is the tax on income in that territory that most closely resembles the features of the UK tax on income. As such, income solely subject to US State or equivalent taxes will not fall within the definition of ‘ordinary income’. This interpretation of ‘foreign tax’ appears to contradict HMRC’s approach to very similar wording in relation to credit relief for foreign tax. Withholding taxes and sales or turnover taxes are not ‘foreign taxes’. Accordingly, income solely subject to withholding will not constitute ordinary income, which may conflict with the legislative wording.


HMRC state that they have aligned their approach on interest free loans and deemed deductions to that of the OECD. Accordingly, a deemed deduction on an interest free loan should not constitute a ‘quasi-payment’. We note that HMRC’s analysis in their updated example at INTM551270 remains less than clear and we will be addressing this issue with HMRC in due course.

Reasonable to suppose

HMRC have asserted that it will be necessary to obtain the relevant tax positions of the parties to the arrangement when determining whether the rules apply, regardless of compliance burden. In the context of private equity this could prove difficult as groups may have limited/no visibility over how investors treat certain instruments or entities.

Just and reasonable

A delay in recognition of the receipt, beyond the 12 month safe harbour provided, will be accepted where, broadly speaking, the arrangements are at arm’s length and the facts and circumstances leading to the late inclusion are outside the payee’s control. A time delay due to differing accounting standards is accepted, unless it contravenes the policy intent or would not occur at arm’s length.

Hybrid financial instruments

Foreign exchange (FX) movements remain outside the scope of the rules, however where there is reason to suspect arrangements involving FX losses are being used to avoid the hybrid mismatch rules, it will be necessary to consider the targeted anti avoidance rules.

Hybrid entity double deduction mismatches

Where a double deduction arises, but in differing amounts due to a valuation issue (e.g. a valuation of share options), the extent of the mismatch will be limited to the ‘lower amount’ actually deducted twice.

Imported mismatches

It is necessary to consider the application of the imported mismatch rules to scenarios where the imported mismatch payment is not being directly funded by payments made by the UK e.g. there is an equity contribution between the imported mismatch payment and the UK payment.


For further information please contact :

Kashif Javed

Greg Smythe

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