Finance (No. 2) Bill (HC Bill 155)

(a) the hybrid transfer arrangement is designed to secure a
hybrid transfer deduction/non-inclusion mismatch, or

(b) the terms of the hybrid transfer arrangement share the
economic benefit of the mismatch between the parties to the
5arrangement or otherwise reflect the fact that the mismatch is
expected to arise.

(8) The hybrid transfer arrangement may be designed to secure a hybrid
transfer deduction/non-inclusion mismatch despite also being
designed to secure any commercial or other objective.

(9) 10Sections 259DE (cases where the payer is within the charge to
corporation tax for the payment period) and 259DF (cases where a
payee is within the charge to corporation tax) make provision for the
counteraction of the hybrid transfer deduction/non-inclusion
mismatch.

259DB 15 Meaning of “hybrid transfer arrangement”, “underlying instrument”
etc

(1) This section has effect for the purposes of this Chapter.

(2) A “hybrid transfer arrangement” means—

(a) a repo,

(b) 20a stock lending arrangement, or

(c) any other arrangement,

that is an arrangement within subsection (3).

(3) An arrangement is within this subsection if it provides for, or relates
to, the transfer of a financial instrument (“the underlying
25instrument”) and—

(a) the dual treatment condition is met in relation to the
arrangement, or

(b) a substitute payment could be made under the arrangement.

(4) The dual treatment condition is met in relation to the arrangement
30if—

(a) in relation to a person, for the purposes of a tax—

(i) the arrangement is regarded as equivalent, in
substance, to a transaction for the lending of money at
interest, and

(ii) 35a payment or quasi-payment made under, or in
connection with, the arrangement or the underlying
instrument could be treated so as to reflect the fact the
arrangement is so regarded, and

(b) in relation to another person, for the purposes of a tax
40(whether or not the same one), such a payment or quasi-
payment would not be treated so as to reflect the
arrangement being regarded as equivalent, in substance, to a
transaction for the lending of money at interest.

(5) A payment or quasi-payment is a “substitute payment” if—

(a) 45it consists of or involves—

(i) an amount being paid, or

(ii) a benefit being given (including the release of the
whole or part of any liability to pay an amount),

(b) that amount, or the value of that benefit, is representative of
a return of any kind (“the underlying return”) that arises on,
5or in connection with, the underlying instrument, and

(c) the amount is paid, or the benefit is given, to someone other
than the person to whom the underlying return arises.

(6) For the purposes of subsection (3) where there is an arrangement, to
which a person (“P”) and another person (“Q”) are party, under
10which—

(a) a financial instrument (“the first instrument”) ceases to be
owned by P (whether or not because it ceases to exist), and

(b) Q comes to own a financial instrument (“the second
instrument”) under which Q has the same, or substantially
15the same, rights and liabilities as P had under the first
instrument,

the second instrument is to be treated as being transferred from P to
Q.

259DC Hybrid transfer deduction/non-inclusion mismatches and their
20extent

(1) There is a “hybrid transfer deduction/non-inclusion mismatch”, in
relation to a payment or quasi-payment, if either or both of case 1 or
2 applies.

(2) Case 1 applies where—

(a) 25the relevant deduction exceeds the sum of the amounts of
ordinary income that, by reason of the payment or quasi-
payment, arise to each payee for a permitted taxable period,
and

(b) all or part of that excess arises for a reason mentioned in
30subsection (7).

(3) For the purposes of subsection (2)(b)—

(a) it does not matter whether the excess or part arises for
another reason as well (even if it would have arisen for that
other reason regardless of any reasons mentioned in
35subsection (7)), and

(b) an excess or part of an excess is to be taken to arise for a
reason mentioned in subsection (7) (so far as would not
otherwise be the case) if, on making such of the relevant
assumptions in relation to each payee as apply in relation to
40that payee (see subsection (4)), it could arise for a reason
mentioned in subsection (7).

(4) These are the “relevant assumptions”—

(a) where a payee is not within the charge to a tax under the law
of a payee jurisdiction because the payee benefits from an
45exclusion, immunity, exemption or relief (however
described) under that law, assume that the exclusion,
immunity, exemption or relief does not apply;

(b) where an amount of income is not included in the ordinary
income of a payee for the purposes of a tax charged under the

law of a payee jurisdiction because the payment or quasi-
payment is not made in connection with a business carried on
by the payee in that jurisdiction, assume that the payment or
quasi-payment is made in connection with such a business;

(c) 5where a payee is not within the charge to a tax under the law
of any territory because there is no territory where the payee
is—

(i) resident for the purposes of a tax charged under the
law of that territory, or

(ii) 10within the charge to a tax under the law of that
territory as a result of having a permanent
establishment in that territory,

assume that the payee is a company that is resident for tax
purposes, and carries on a business in connection with which
15the payment or quasi-payment is made, in the United
Kingdom.

(5) Case 2 applies where there are one or more amounts of ordinary
income (“under-taxed amounts”) that—

(a) arise, by reason of the payment or quasi-payment, to a payee
20for a permitted taxable period, and

(b) are under taxed for a reason mentioned in subsection (7).

(6) For the purposes of subsection (5)(b) it does not matter whether an
amount of ordinary income is under taxed for another reason as well
(even if it would have been under taxed for that other reason
25regardless of any reason mentioned in subsection (7)).

(7) The reasons are—

(a) the dual treatment condition being met in relation to a hybrid
transfer arrangement under, or in connection with, which the
payment or quasi-payment is made (see section 259DB(4));

(b) 30the payment or quasi-payment being a substitute payment.

(8) For the purposes of this section, disregard—

(a) any part of an excess mentioned in subsection (2), and

(b) any under-taxed amount,

in relation to which the financial trader exclusion applies (see section
35259DD).

(9) A taxable period of a payee is “permitted” in relation to an amount
of ordinary income that arises as a result of the payment or quasi-
payment if—

(a) the period begins before the end of 12 months after the end of
40the payment period, or

(b) where the period begins after that—

(i) a claim has been made for the period to be a permitted
period in relation to the amount of ordinary income,
and

(ii) 45it is just and reasonable for the amount of ordinary
income to arise for that taxable period rather than an
earlier period.

(10) An amount of ordinary income of a payee, for a permitted taxable
period, is “under taxed” if the highest rate at which tax is charged on

the taxable profits of the payee in which the amount is included,
taking into account on a just and reasonable basis the effect of any
credit for underlying tax, is less than the payee’s full marginal rate
for that period.

(11) 5The payee’s “full marginal rate” means the highest rate at which the
tax that is chargeable on the taxable profits mentioned in subsection
(10) could be charged on taxable profits, of the payee for the
permitted taxable period, which include ordinary income that arises
from, or in connection with, a financial instrument.

(12) 10A “credit for underlying tax” means a credit or relief given to reflect
tax charged on profits that are wholly or partly used to fund (directly
or indirectly) the payment or quasi-payment.

(13) Where case 1 applies, the amount of the hybrid transfer deduction/
non-inclusion mismatch is equal to the excess that arises as
15mentioned in subsection (2)(b).

(14) Where case 2 applies, the amount of the hybrid transfer deduction/
non-inclusion mismatch is equal to the sum of the amounts given in
respect of each under-taxed amount by—

(15) Where cases 1 and 2 both apply, the amount of the hybrid transfer
30deduction/non-inclusion mismatch is the sum of the amounts given
by subsections (13) and (14).

259DD The financial trader exclusion

(1) This section has effect for the purposes of section 259DC(8).

(2) The financial trader exclusion applies, in relation to an excess or part
35of an excess mentioned in section 259DC(2) or an under-taxed
amount, where conditions A to C are met.

(3) Condition A is that the excess or part arises, or the under-taxed
amount is under taxed, because the payment or quasi-payment—

(a) is a substitute payment,

(b) 40is treated, for the purposes of tax charged on a person, so as
to reflect the fact that it is representative of the underlying
return, and

(c) is not so treated for the purposes of tax charged on another
person (“the financial trader”) because that person brings the
45substitute payment into account in calculating the profits of a
trade under—

(i) Part 3 of CTA 2009 (trading income), or

(ii) an equivalent provision of the law of a territory
outside the United Kingdom.

(4) Condition B is that the financial trader also brings any associated
5payments into account as mentioned in subsection (3)(c).

(5) In subsection (4) “associated payment” means a payment or quasi-
payment—

(a) in relation to which the financial trader is the payer or a
payee, and

(b) 10that is made under, or in connection with, the underlying
instrument or an arrangement that relates to the underlying
instrument.

(6) Condition C is that—

(a) if the underlying return were to arise, and be paid directly, to
15the payee or payees in relation to the substitute payment,
neither Chapter 3 (hybrid and other mismatches from
financial instruments) nor any equivalent provision under
the law of a territory outside the United Kingdom would
apply, and

(b) 20the hybrid transfer arrangement under, or in connection
with, which the substitute payment is made is not a
structured arrangement (within the meaning given by
section 259DA(7) and (8)).

Counteraction

259DE 25 Counteraction where the payer is within the charge to corporation tax
for the payment period

(1) This section applies where the payer is within the charge to
corporation tax for the payment period.

(2) For corporation tax purposes, the relevant deduction that may be
30deducted from the payer’s income for the payment period is reduced
by an amount equal to the hybrid transfer deduction/non-inclusion
mismatch mentioned in section 259DA(5).

259DF Counteraction where a payee is within the charge to corporation tax

(1) This section applies in relation to a payee where—

(a) 35the payee is within the charge to corporation tax for an
accounting period some or all of which falls within the
payment period, and

(b) it is reasonable to suppose that—

(i) neither section 259DE nor any equivalent provision
40under the law of a territory outside the United
Kingdom applies, or

(ii) a provision of the law of a territory outside the United
Kingdom that is equivalent to section 259DE applies,
but does not fully counteract the hybrid transfer
45deduction/non-inclusion mismatch mentioned in
section 259DA(5).

(2) A provision of the law of a territory outside the United Kingdom that
is equivalent to section 259DE does not fully counteract that
mismatch if (and only if)—

(a) it does not reduce the relevant deduction by the full amount
5of the mismatch, and

(b) the payer is still able to deduct some of the relevant
deduction from income in calculating taxable profits.

(3) In this section “the relevant amount” is—

(a) in a case where subsection (1)(b)(i) applies, an amount equal
10to the hybrid transfer deduction/non-inclusion mismatch
mentioned in section 259DA(5), or

(b) in a case where subsection (1)(b)(ii) applies, the lesser of—

(i) the amount by which that mismatch exceeds the
amount by which it is reasonable to suppose the
15relevant deduction is reduced by a provision under
the law of a territory outside the United Kingdom that
is equivalent to section 259DE, and

(ii) the amount of the relevant deduction that may still be
deducted as mentioned in subsection (2)(b).

(4) 20If the payee is the only payee, the relevant amount is to be treated as
income arising to the payee for the counteraction period.

(5) If there is more than one payee, an amount equal to the payee’s share
of the relevant amount is to be treated as income arising to the payee
for the counteraction period.

(6) 25The payee’s share of the relevant amount is to be determined by
apportioning that amount between all the payees on a just and
reasonable basis, having regard (in particular)—

(a) to any arrangements as to profit sharing that may exist
between some or all of the payees,

(b) 30to whom any under-taxed amounts (within the meaning
given by section 259DC(5)) arise, and

(c) to whom any amounts of ordinary income that it would be
reasonable to expect to arise as a result of the payment or
quasi-payment, but that do not arise, would have arisen.

(7) 35An amount of income that is treated as arising under subsection (4)
or (5) is chargeable under Chapter 8 of Part 10 of CTA 2009 (income
not otherwise charged) (despite section 979(2) of that Act).

(8) The “counteraction period” means—

(a) if an accounting period of the payee coincides with the
40payment period, that accounting period, or

(b) otherwise, the first accounting period of the payee that is
wholly or partly within the payment period.

CHAPTER 5 Hybrid payer deduction/non-inclusion mismatches

Introduction

259E Overview of Chapter

(1) This Chapter contains provision that counteracts deduction/non-
5inclusion mismatches that it is reasonable to suppose would
otherwise arise from payments or quasi-payments because the payer
is a hybrid entity.

(2) The Chapter counteracts mismatches where the payer or a payee is
within the charge to corporation tax and does so by altering the
10corporation tax treatment of the payer or a payee.

(3) Section 259EA contains the conditions that must be met for this
Chapter to apply.

(4) Section 259EB defines “hybrid payer deduction/non-inclusion
mismatch” and provides how the amount of the mismatch is to be
15calculated.

(5) Section 259EC contains provision that counteracts the mismatch
where the payer is within the charge to corporation tax for the
payment period.

(6) Section 259ED contains provision that counteracts the mismatch
20where a payee is within the charge to corporation tax and the
mismatch is not fully counteracted by provision under the law of a
territory outside the United Kingdom that is equivalent to section
259EC.

(7) See also—

(a) 25section 259BB for the meaning of “payment”, “quasi-
payment”, “payment period”, “relevant deduction”, “payer”
and “payee”, and

(b) section 259BE for the meaning of “hybrid entity”, “investor”
and “investor jurisdiction”.

30Application of Chapter

259EA Circumstances in which the Chapter applies

(1) This Chapter applies if conditions A to E are met.

(2) Condition A is that a payment or quasi-payment is made under, or
in connection with, an arrangement.

(3) 35Condition B is that the payer is a hybrid entity (“the hybrid payer”).

(4) Condition C is that—

(a) the hybrid payer is within the charge to corporation tax for
the payment period, or

(b) a payee is within the charge to corporation tax for an
40accounting period some or all of which falls within the
payment period.

(5) Condition D is that it is reasonable to suppose that, disregarding the
provisions mentioned in subsection (6), there would be a hybrid
payer deduction/non-inclusion mismatch in relation to the payment
or quasi-payment (see section 259EB).

(6) 5The provisions are—

(a) this Chapter and Chapters 6 to 10, and

(b) any equivalent provision under the law of a territory outside
the United Kingdom.

(7) Condition E is that—

(a) 10it is a quasi-payment that is made as mentioned in subsection
(2) and the hybrid payer is also a payee (see section 259BB(7)),

(b) the hybrid payer and a payee are in the same control group
(see section 259NA) at any time in the period—

(i) beginning with the day on which the arrangement
15mentioned in subsection (2) is made, and

(ii) ending with the last day of the payment period, or

(c) that arrangement is a structured arrangement.

(8) The arrangement is “structured” if it is reasonable to suppose that—

(a) the arrangement is designed to secure a hybrid payer
20deduction/non-inclusion mismatch, or

(b) the terms of the arrangement share the economic benefit of
the mismatch between the parties to the arrangement or
otherwise reflect the fact that the mismatch is expected to
arise.

(9) 25The arrangement may be designed to secure a hybrid payer
deduction/non-inclusion mismatch despite also being designed to
secure any commercial or other objective.

(10) Sections 259EC (cases where the hybrid payer is within the charge to
corporation tax for the payment period) and 259ED (cases where a
30payee is within the charge to corporation tax) contain provision for
the counteraction of the hybrid payer deduction/non-inclusion
mismatch.

259EB Hybrid payer deduction/non-inclusion mismatches and their extent

(1) There is a “hybrid payer deduction/non-inclusion mismatch”, in
35relation to a payment or quasi-payment, if—

(a) the relevant deduction exceeds the sum of the amounts of
ordinary income that, by reason of the payment or quasi-
payment, arise to each payee for a permitted taxable period,
and

(b) 40all or part of that excess arises by reason of the hybrid payer
being a hybrid entity.

(2) The amount of the hybrid payer deduction/non-inclusion mismatch
is equal to the excess that arises as mentioned in subsection (1)(b).

(3) For the purposes of subsection (1)(b)—

(a) 45it does not matter whether the excess or part arises for
another reason as well (even if it would have arisen for that

other reason regardless of whether the hybrid payer is a
hybrid entity), and

(b) an excess or part of an excess is to be taken to arise by reason
of the hybrid payer being a hybrid entity (so far as would not
5otherwise be the case) if, on making such of the relevant
assumptions in relation to each payee as apply in relation to
that payee (see subsection (4)), it could arise by reason of the
hybrid payer being a hybrid entity.

(4) These are the “relevant assumptions”—

(a) 10where a payee is not within the charge to a tax under the law
of a payee jurisdiction because the payee benefits from an
exclusion, immunity, exemption or relief (however
described) under that law, assume that the exclusion,
immunity, exemption or relief does not apply;

(b) 15where an amount of income is not included in the ordinary
income of a payee for the purposes of a tax charged under the
law of a payee jurisdiction because the payment or quasi-
payment is not made in connection with a business carried on
by the payee in that jurisdiction, assume that the payment or
20quasi-payment is made in connection with such a business;

(c) where a payee is not within the charge to a tax under the law
of any territory because there is no territory where the payee
is—

(i) resident for the purposes of a tax charged under the
25law of that territory, or

(ii) within the charge to a tax under the law of that
territory as a result of having a permanent
establishment in that territory,

assume that the payee is a company that is resident for tax
30purposes, and carries on a business in connection with which
the payment or quasi-payment is made, in the United
Kingdom.

(5) A taxable period of a payee is “permitted” in relation to an amount
of ordinary income that arises as a result of the payment or quasi-
35payment if—

(a) the period begins before the end of 12 months after the end of
the payment period, or

(b) where the period begins after that—

(i) a claim has been made for the period to be a permitted
40period in relation to the amount of ordinary income,
and

(ii) it is just and reasonable for the amount of ordinary
income to arise for that taxable period rather than an
earlier period.

45Counteraction

259EC Counteraction where the hybrid payer is within the charge to
corporation tax for the payment period

(1) This section applies where the hybrid payer is within the charge to
corporation tax for the payment period.

(2) For corporation tax purposes, the relevant deduction so far as it does
not exceed the hybrid payer deduction/non-inclusion mismatch
mentioned in section 259EA(5) (“the restricted deduction”) may not
be deducted from the hybrid payer’s income for the payment period
5unless it is deducted from dual inclusion income for that period.

(3) So much of the restricted deduction (if any) as, by virtue of
subsection (2), cannot be deducted from the payer’s income for the
payment period—

(a) is carried forward to subsequent accounting periods of the
10payer, and

(b) for corporation tax purposes, may be deducted from dual
inclusion income for any such period (and not from any other
income), so far as it cannot be deducted under this paragraph
for an earlier period.

(4) 15In this section “dual inclusion income” means an amount that arises
in connection with the arrangement mentioned in section 259EA(2)
and is both—

(a) ordinary income of the payer for corporation tax purposes,
and

(b) 20ordinary income of an investor in the payer for the purposes
of any tax charged under the law of an investor jurisdiction.

259ED Counteraction where a payee is within the charge to corporation tax

(1) This section applies in relation to a payee where—

(a) the payee is within the charge to corporation tax for an
25accounting period some or all of which falls within the
payment period, and

(b) it is reasonable to suppose that—

(i) no provision under the law of a territory outside the
United Kingdom that is equivalent to section 259EC
30applies, or

(ii) such a provision does apply, but does not fully
counteract the hybrid payer deduction/non-
inclusion mismatch mentioned in section 259EA(5).

(2) A provision of the law of a territory outside the United Kingdom that
35is equivalent to section 259EC does not fully counteract that
mismatch if (and only if)—

(a) the amount of the relevant deduction that the provision
prevents from being deducted from income of the hybrid
payer, for the payment period, other than dual inclusion
40income, is less than the amount of the mismatch, and

(b) the hybrid payer is still able to deduct some of the relevant
deduction from income, for the payment period, that is not
dual inclusion income.

(3) In this section “the relevant amount” is—

(a) 45in a case where subsection (1)(b)(i) applies, an amount equal
to the hybrid payer deduction/non-inclusion mismatch
mentioned in section 259EA(5), or

(b) in a case where subsection (1)(b)(ii) applies, the lesser of—