Proposed FB 2021 changes to the UK hybrid mismatch rules

Proposed FB 2021 changes to the UK hybrid mismatch rule

Significant changes are being made to the UK’s hybrid mismatch rules. The impact to current structures and past/future filing positions will need to be considered.


Finance Bill 2021 includes a number of important changes to the UK hybrid mismatch rules. These rules counteract tax mismatches arising from a hybrid instrument, hybrid entity, branch or dual-resident company, and the proposed changes are largely helpful to taxpayers. This article provides a high-level overview of some of the key changes and actions that taxpayers might need to take.

The changes have different commencement dates. Some changes apply retrospectively from 1 January 2017 and may result in amounts no longer being disallowed (although there is currently no special provision allowing a closed return to be re-opened to remove a disallowance now not required). One change applies from 1 January 2021, and two can apply from 1 January 2017 if an election is made by 31 December 2021 (in which case amendments can be made to closed returns but only for these two changes). Otherwise, changes apply from Royal Assent.

Key changes include the following:

  • A new concept of inclusion/no deduction income, which can be treated as dual-inclusion income when determining to what extent a double deduction mismatch should be counteracted. This may benefit US groups with disregarded UK subsidiaries, although not in all scenarios where effective double taxation might currently be suffered;
  • Members of a UK group relief group may be able to match dual-inclusion income and double deductions within a group, so that only the net group position is counteracted. This may help taxpayers whose group structure results in income arising in the ‘wrong’ entity (compared to relevant expenses);
  • The rules regarding illegitimate overseas deductions will be amended so that they will only disallow UK relief where the relevant double deduction is utilised for overseas tax purposes by an entity other than the UK corporation tax (CT) paying company or its investor(s). This may assist US groups with disregarded UK loss making subsidiaries;
  • The definition of ‘foreign tax’ will be amended to clarify that payments included in a US global intangible low-taxed income (GILTI) charge will not count as ‘included’ for the purposes of determining whether the payment gives rise to a mismatch. This will adversely impact groups that currently take the opposite view under the existing rules;
  • An entity will only be regarded as a ‘hybrid entity’ if it has this status by virtue of the way it is treated for tax purposes in its own territory and that of its investors (rather than in any territory). This may help, for example, where an entity is regarded as tax transparent locally and by all its investors, but is regarded as opaque for UK tax purposes, and thereby currently treated as a ‘hybrid entity’. Hence UK deductions may no longer be disallowed as a result;
  • New rules will be introduced that may prevent hybrid counteractions from arising in certain cases where the recipient of a payment is (i) a commercial lender or sub-five percent shareholder, (ii) a Qualifying Institutional Investor, or (iii) a sub-10 percent participant in a transparent fund. These changes should help simplify the need for UK companies and fund managers to diligence the tax status of ultimate payees holding small minority interests;
  • The imported mismatch rules can deny a UK deduction where a mismatch arises outside the UK as part of wider arrangements. These rules will be amended, in particular so that they (i) operate proportionately where the UK payment is less than the relevant overseas payment (either naturally or by operation of the UK transfer pricing rules) and (ii) will not apply where a relevant overseas territory has hybrid mismatch rules that are equivalent to the UK regime as a whole. As a result, any current counteraction required may be reduced or eliminated;
  • Amendments will be made to help ensure loan releases do not become taxable for the borrower as a result of a hybrid counteraction in certain circumstances where a credit arising from the release would have been exempted for UK tax purposes had it been recognised in the P&L. This change should assist company debt restructuring; and
  • Other changes impact securitisation vehicles, investment trusts and Capital Attribution Tax Adjustments (CATA).

The changes resolve a number of issues but not all the problems that have been experienced in relation to the existing rules. Groups should revisit their existing structures to assess the impact of the changes and consider whether to elect to apply certain rules retrospectively. Restructuring may be required to align with the new legislative landscape.

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