Revenue Note for Guidance

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Revenue Note for Guidance

Chapter 4

Financial instruments

Summary

This chapter sets out the anti-hybrid rules relating to differences in the characterisation of a financial instrument or a payment under a financial instrument.

835AH Interpretation

Summary

The section provides the meaning for certain terms for the purposes of this chapter.

Details

(1) Definitions

‘financial instrument’ includes—

  1. securities, within the meaning of section 135(8) (Distributions; supplemental) ,
  2. shares in a company and similar ownership rights (not being securities) in entities other than a company,
  3. futures, options, swaps, derivatives and similar instruments that give rise to a financing return,
  4. an arrangement where it is reasonable to consider that the arrangement is equivalent to an arrangement for the lending of money, or money’s worth, at interest, and
  5. hybrid transfers;

“hybrid transfer” means an arrangement to transfer a financial instrument where the underlying return on that instrument is treated, for tax purposes, as derived by more than one of the parties to the arrangement;

“financial trader” means an enterprise that has entered into a financial instrument as part of a business which involves regularly buying and selling financial instruments on that enterprise’s own account;

“on-market hybrid transfer” means a hybrid transfer—

  1. that a financial trader enters into in the ordinary course of its trade, which includes the business of buying and selling financial instruments, and
  2. the financial trader treats all amounts received in connection with the transferred financial instrument concerned as trading income;

“financing return”, in relation to a financial instrument, includes—

  1. dividends and manufactured payments,
  2. interest, including any discounts or amounts which would be treated as interest under Part 8A (Specified Financial Transaction (Islamic Financing)), notwithstanding that no election is made under section 267U,
  3. the amount of payments that are equivalent to interest under an arrangement described at paragraph (d) of the definition of “financial instrument”
  4. the underlying return referred to in the definition of “hybrid transfer”;

“manufactured payment” has the same meaning as it has in Chapter 3 of Part 28 (Stock Borrowing and Repurchase Agreement).

Conditions where a corresponding amount relating to a payment under a financial instrument shall not be regarded as included in the payee territory for the purposes of this chapter.

(2)(a) A corresponding amount shall not be regarded as included where the amount that is charged to foreign tax in the payee territory is reduced by reference to the way the payment under the financial instrument is characterised under those laws, and

(2)(b) A corresponding amount relating to a payment under a financial instrument shall not be treated as included unless—

  1. the corresponding amount is included in a tax period which commences within twelve months of the end of the payer’s tax period, or
  2. it would be reasonable to consider that—
    1. the corresponding amount will be included in a tax period subsequent to the payers tax period, and
    2. the terms applicable to the payment are those that would apply to a transaction made at arm’s length.

Relevant Date: Finance Act 2021