Proposed changes to the UK’s hybrid mismatch rules
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 to ensure you are not caught.
Hybrid mismatch rules are designed to eliminate double non-taxation outcomes that arise from a ‘hybrid arrangement’. The recent Finance (No.2) Bill 2019-21 includes a substantial number of amendments to the existing corporation tax hybrid mismatch rules. It is designed to ensure that the rules operate more proportionately.
Definition of Hybrid Entity
An entity will only be considered 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 means that where the UK’s view on the classification of an entity is only relevant where it is established or resident in the UK, or an investor in the entity is established or resident in the UK.
Changes to Deemed Dual Inclusion Income
The extension of the definition of dual inclusion income will enable amounts which are taxable in the hands of the UK hybrid entity but not deductible for any non-UK tax purposes. Dual inclusion income broadly comprises income that is brought within the charge to tax in more than one tax jurisdiction. This can be vital to mitigating the extent to which additional UK tax charges arise due to the operation of the hybrid mismatch rules.
The payment will be inclusion/no deduction income. Providing it would be deduction for tax purposes in the investors jurisdiction. The legislation allows taxpayers to elect for the deemed dual inclusion income rules to apply retrospectively from 1 January 2017. The election, together with all amended corporation tax returns, must be filed with HMRC by 31 December 2021.
Changes to the Surrender of Surplus Dual Inclusion Income
This allows companies who are a member of a UK 75% group to match dual-inclusion income with double deductions of another member of the group. Certain requirements for this will need to be met. The resulting counteraction applies only on the net group position. This came into effect from 1 January 2021.
What constitutes an illegitimate overseas deduction?
The rules will be amended to only disallow UK relief where the relevant double deduction is used for overseas tax purposes by an entity other than the UK Corporation Tax paying company or its investors.
What to do?
As mentioned above, taxpayers can elect for the deemed dual inclusion income rules to apply retrospectively from 1 January 2017. This is the date the hybrid mismatch rules first took effect. Consequently, taxpayers can amend and resubmit their corporation tax returns to reflect the application of the deemed dual inclusion provisions. The election, together with all amended corporation tax returns, must be filed with HMRC by 31 December 2021.