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Updated HMRC guidance on the hybrid and other mismatches rules

Updated HMRC guidance on the hybrid and other rules

KPMG’s Rob Norris and Mark Eaton consider HMRC’s updated guidance on the UK hybrid and other mismatches rules.

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Mark Eaton - Director, International Tax, KPMG UK

Director, International Tax

KPMG in the UK

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The updated guidance reflects various legislative changes made to the hybrid mismatch rules since inception (with a useful summary of these now being included at INTM550095). It also provides helpful clarification of HMRC’s position on a number of points of interpretation (although there are still several residual areas of interpretation where uncertainty remains).

Some key points of interest emerging from the revised guidance are as follows:

  • A new worked example at INTM550080 illustrating the interaction between the hybrid rules and the transfer pricing rules;
  • Guidance at INTM550540 regarding payments or quasi-payments made by a securitisation company;
  • Guidance at INTM550570 regarding when HMRC will consider a foreign controlled foreign company (CFC) charge to qualify as ‘equivalent’ to the UK CFC charge;
  • Guidance at INTM551065 on the new special exclusion for certain regulatory capital securities that will apply from 1 Jan 2020;
  • Guidance at INTM553090 on how to make a claim to extend the ‘permitted period’ in which income can qualify as dual inclusion income;
  • Amendments to the guidance on ‘structured arrangements’ at INTM551110 and INTM556070 to note that “it is likely, but not essential” that the parties would be aware of the mismatch;
  • Amendments to the guidance at INTM557080, INTM557220 and INTM557230 to suggest HMRC are only likely to be satisfied that a company will not have any dual inclusion income in future if a company has ceased or been struck off;
  • Guidance at INTM557085 on section 259ID FA 2018 (which provides the ability to deduct a hybrid entity double deduction amount from certain related party income in some cases), including commenting on Condition D (which HMRC say refers specifically to ‘the’ investor and should not be interpreted more widely to include ‘any’ investor); and
  • Various points in relation to the ‘imported mismatch rules’ in Chapter 11 (which can disallow a UK payer UK tax relief due to an overseas mismatch in the same series of arrangements), including:

    • Confirmation at INTM559260 that HMRC consider there is not a requirement to re-test whether there would be a mismatch by reference to the UK tax analysis that would apply if the UK payer were a UK payer or payee in relation to the overseas payment;
    • Confirmation at INTM559310 that the mechanical allocation rules from the OECD 2015 Final Report can be used as a starting position for any ‘just and reasonable’ allocation between UK and non-UK payments; and
    • A new example at INTM559405 illustrating when a UK payment can be regarded as part of the same ‘series of arrangements’ as an overseas payment.

The updated guidance is available here: http://www.hmrc.gov.uk/gds/INTM/images/INTM850000_hybrids.pdf. Note that the HMRC mailbox has now been changed to hybrids.mailbox@hmrc.gov.uk and the address for hybrid claims etc. has now been updated to a Newcastle address.

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