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Budget: Amendments to the hybrids and other mismatch rules

Amendments to the hybrids and other mismatch rules

A number of changes are proposed to be made to the hybrid and other mismatch rules, some with retrospective effect.


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The hybrid and other mismatch rules apply from 1 January 2017 and have proved difficult to apply in practice. In the Autumn Budget the Chancellor announced a number of technical changes to help ensure the rules operate as intended. We await draft legislation (expected on 1 December 2017) to see the details of the proposed changes but it is welcome that HMRC are looking to clarify the application of the rules.

Set out below are some comments on the proposed changes, based upon the limited information available at present.

Retrospective changes
A number of proposed technical changes will have retrospective effect from 1 January 2017, the original commencement date. These changes will align the legislation with HMRC’s interpretation of the legislation as reflected in draft guidance and provide for some new relieving measures.

In particular, a new relieving measure is expected to apply where a company is disregarded or treated as a partnership by its shareholders (a ‘hybrid entity’). One of the charging chapters (Chapter 9 of Part 6A TIOPA 2010) is relevant where such a company deducts an amount, and the amount is also deductible for the company’s shareholders (a ‘double deduction’).

This new relieving measure is expected to reduce the potential disallowance under Chapter 9 in circumstances where the company has taxable income which is not deductible to the payer, and is connected to third party income. It is hoped that the change will prevent inappropriate counteraction taking place in these circumstances.

Changes with prospective effect
Two changes are being made with effect from 1 January 2018:

  • HMRC are of the view that amounts subject to tax at a rate of 0 percent are to be disregarded when assessing whether there is a mismatch in the tax treatment. This is to be confirmed in legislation; and
  • One of the charging chapters (Chapter 8) is relevant where the payee is a company which is resident in one territory and carries on a business in another territory through a permanent establishment (a ‘multinational company’). We understand that changes are to be made to clarify when a mismatch in the tax treatment arises as a result of the payee being a multinational company, and hence when a counteraction is required under this chapter.

Although these proposed changes are not being made with retrospective effect, we understand that they do not impact on the way HMRC interpret the rules since they came into effect from 1 January 2017.

Other matters
We understand that HMRC are open to considering other changes to improve the workings of the legislation. There are many other examples of where the rules may result in inappropriate counteraction and it is hoped that HMRC will continue to improve the rules.

Revised HMRC guidance was expected at the end of October and we now understand that this is to be issued in the next week or so.

For further information please contact:

Rob Norris

Mark Eaton

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