Amendment to the regulatory capital exclusion from hybrid mismatch rules to comply with ATAD

Amendment to the regulatory capital exclusion

The exclusion from the hybrid mismatch rules for regulatory capital instruments has been amended to comply with ATAD.

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Director, Financial Services Tax

KPMG in the UK


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On 15 October 2019, The Hybrid and Other Mismatches (Financial Instruments: Excluded Instruments) Regulations 2019 were laid to bring the exclusion from the UK hybrid mismatch rules for regulatory capital instruments into line with the requirements of the Anti-Tax Avoidance Directive (ATAD) from 1 January 2020.

The Regulations (SI 2019/1345) replace the existing carve-out in The Hybrid and Other Mismatches (Financial Instrument: Exclusions) Regulations (SI 2019/1251) which will therefore only apply from 1 January 2019 to 31 December 2019.

Our previous article in Tax Matters Digest discussed the existing carve-out in further detail.

As anticipated, the new exclusion is narrower in scope.

Firstly, it only applies to the banking sector and so insurance groups which currently rely on the existing carve out, should be considering how the anti-hybrid rules will apply to them from 1 January 2020.

Secondly, the new exemption explicitly excludes structured arrangements. In this context it is worth noting that the exclusion is given effect by cross referring to the relevant provision of ATAD. This means that, for example, in assessing whether there is a ‘structured arrangement’ it is the ATAD definition rather than the UK statutory definition which is in point.

The exclusion includes a sunset clause which means that without further steps, there will be no regulatory capital carve-out from the hybrid mismatch rules after 31 December 2022. This is consistent with the requirements of ATAD although it is, of course, not yet clear whether the UK will still be subject to ATAD after 31 December 2022. HMRC have previously been non-committal about the likely future approach in the event the UK is no longer formally bound by ATAD, but the inclusion of an explicit sunset clause may suggest that the policy view is now tending towards following the ATAD approach of not giving special treatment to regulatory capital.

HMRC are expected to issue guidance later this year on how the scope of the ATAD exclusion will be interpreted which should shed further light on the above-mentioned matters.

For further information please contact :

Paul Freeman

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