Hybrid and other mismatches: Exemptions for regulatory capital - compliance with EU Anti-Tax Avoidance Directive
Published 30 October 2019
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Who is likely to be affected
Banks who issue hybrid capital instruments to overseas associates.
General description of the measure
These regulations exempt certain hybrid capital and debt instruments issued by banks to their overseas associates from counteraction under the hybrids legislation. The exemption is subject to the requirements of the EU Anti-Tax Avoidance Directive (ATAD).
Policy objective
Interest paid on hybrid instruments issued by banks to meet regulatory requirements should be deductible, subject to meeting the minimum standards for exemption set out in ATAD.
Background to the measure
The hybrid and other mismatches legislation is an anti-avoidance regime that seeks to counteract mismatches in the tax treatment of instruments and structures across jurisdictions.
Broadly, where payments give rise to deductions without a corresponding taxable receipt, the hybrid and other mismatches legislation will apply to either deny the deduction or bring the receipt into charge. However, banks issue hybrid regulatory capital instruments that include some features which may mean there is a mismatch in tax treatment across jurisdictions.
It is not intended that these should be counteracted by the hybrid and other mismatch rules, as this would override the general policy objective that interest paid on regulatory capital instruments should be deductible.
ATAD sets out minimum standards for a number of anti-avoidance measures, including hybrid mismatches. The Directive includes specific conditions that need to be met in order for regulatory capital to be exempt from the scope of hybrid mismatch rules. This measure ensures that the UK hybrid and other mismatches legislation complies with the Directive.
Detailed proposal
Operative date
The measure will have effect from 1 January 2020.
Current law
Section 259N(3)(b) of the Taxation of (International and Other Provisions) Act 2010 previously provided an exemption for financial instruments that were regulatory capital securities for the purpose of the RCS Regulations.
Section 19(4) of the Finance Act 2019 replaced section 259N(3)(b) of the Taxation of (International and Other Provisions) Act 2010 with a new power for the Treasury to make exemptions in secondary legislation. Paragraph 1 of Schedule 20 to the Finance Act 2019 revoked the RCS Regulations with effect from 1 January 2019. Section 19(9) of the Finance Act 2019 maintained the existing exemption until new regulations come into force.
The Hybrid and Other Mismatches (Financial Instrument: Exclusions) Regulations 2019, which were laid on 10 September 2019, provided a new exemption that mirrors the scope of the previous exemption in Section 259N(3)(b) Taxation of (International and Other Provisions) Act 2010 and also exempts certain other financial instruments that count towards a bank’s regulatory capital requirements. Those regulations will have effect from 1 January 2019 onwards.
Proposed revisions
This measure will supersede the current regulations and will provide an exemption for regulatory capital that meets the detailed requirements set out in ATAD. This new exemption will come into force on 1 January 2020, and, in accordance with the Directive, will provide an exemption for certain regulatory capital until 31 December 2022. The exemption will only apply to instruments issued by banking entities.
The new regulations operate by cross-referencing to the detailed requirements set out in paragraph 4, Article 9 of EU Directive 2016/1164 –ATAD.
HMRC will issue guidance on the application of the ATAD requirements before the end of 2019.
Summary of impacts
Exchequer impact (£m)
| 2018 to 2019 | 2019 to 2020 | 2020 to 2021 | 2021 to 2022 | 2022 to 2023 | 2023 to 2024 |
|---|---|---|---|---|---|
| nil | nil | nil | nil | nil | nil |
This measure is not expected to have an Exchequer impact.
Economic impact
This measure is not expected to have any significant economic impacts.
Impact on individuals, households and families
This measure has no impact on individuals as it only affects banks. There is no impact on family formation, stability or breakdown.
Equalities impacts
We do not anticipate that there will be impacts on groups sharing protected characteristics.
Impact on business including civil society organisations
This measure is expected to have a negligible business administration impact on a small number of banks. One-off costs for these businesses will include familiarisation with the new rules. There are not expected to be any ongoing costs. This measure is not expected to impact on civil society organisations.
Operational impact (£m) (HMRC or other)
There are no financial consequences for HMRC.
Other impacts
There is no impact on climate and fuel poverty targets or air quality targets. Other impacts have been considered and none have been identified.
Monitoring and evaluation
The measure will be monitored through communications with affected taxpayer groups.
Declaration
Jesse Norman MP, Financial Secretary to the Treasury, has read this tax information and impact note and is satisfied that, given the available evidence, it represents a reasonable view of the likely costs, benefits and impacts of the measure.