HM Revenue and Customs Brief 24/14 - Special Securities
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Issued: 19 June 2014
Tax treatment under Part 23 Corporation Tax Act 2010
(distributions) of securities subject to “bail-in” provisions (part of
the Special Resolution Regime introduced by the Banking Act 2009)
This brief announces a change in HM Revenue & Customs
(“HMRC”) policy concerning how the “special securities” provisions of
the Corporation Tax distributions rules (at Part 23 Corporation Tax Act
2010 (“CTA10”)) apply to securities that are subject to the bail-in
provisions which form part of the Special Resolution Regime in the
Banking Act 2009.
Following the financial crisis in 2008 rules were introduced
by the Banking Act 2009 to strengthen the UK’s statutory framework for
financial stability and depositor protection, the Act put in place a
special resolution regime including three stabilisation options; the
Financial Services (Banking Reform) Act 2013 (which received Royal
Assent on 18 December 2013) inserted a new stabilisation option – the
“bail-in option”. One of the aims of this legislation is to ensure that
financial institutions and their investors have greater responsibility
to absorb losses in the event of a crisis, avoiding the need for
The bail-in option allows for the restructuring of a
financial institution judged by regulators to be “failing or about to
fail”. On the exercise of bail-in powers, specific liabilities of a
financial institution may be cancelled or the terms under which the
liability arises amended. In relation to any particular security, this
may mean that the liability is written down or converted to equity, or
the amount of the consideration altered.
This guidance applies to any instrument that is or becomes
subject to regulatory bail-in powers. However, HMRC will not challenge
the treatment of a security issued before the date this guidance was
updated (19 June 2014) where a financial institution seeks to rely on
HMRC’s previous view.
Previously, HMRC took the view (stated in published Notes
issued in June and September 2012) that any “additional tier 1” (AT1)
or “tier 2” (T2) instruments subject to a statutory bail-in regime
would become “results dependent” for the purpose of section 1015(4)
CTA10 from the time that the regulatory regime came into force.
Consequently, those instruments would be considered “special
securities” and their coupons treated as distributions. HMRC took the
same view in relation to other instruments that specifically referred
to the bail-in provisions in their terms of issue or prospectuses.
AT1 and T2 instruments are now defined comprehensively and at
length in the EU Capital Requirements Regulations No 575/2013. Broadly,
AT1 is available to be called to absorb losses on a going concern basis
(as well as on a winding-up), and “additional” means additional to
common equity. T2 is available to absorb losses in a winding-up and
availability is denied to the holder until all other obligations have
been satisfied (i.e. it is subordinated).
HMRC accepts, following a further review of the issues, that
for all securities (not just AT1 and T2) any possible change in terms
triggered by an exercise of regulatory intervention powers is outside
the scope of section 1015(4). Thus, the fact that the statutory bail-in
regime may apply to a particular instrument will not in itself make
that instrument “results dependent”. This will be the case regardless
of whether or not the instrument in question specifically refers to the
regulatory bail-in regime, either in its terms of issue or in the
HMRC also accepts that the potential application of the
bail-in regime will not in itself make an instrument a non-commercial
security within section 1005 CTA10 (see CTM15502).
AT1 and T2 Capital
The Taxation of Regulatory Capital Securities Regulations
2013 (SI 2013/3209), which applies from 1 January 2014, provides that
payments in respect of AT1 and T2 instruments are not treated as
distributions for the purposes of the Taxes Acts. This guidance deals
with securities which do not fall within the scope of those Regulations.
What is being published?
Updated guidance on special securities to reflect HMRC change
in policy, see CTM15521. This Business Brief now supersedes the
previous published Note titled “The current tax treatment of
instruments designed to be compliant with Capital Requirements
About the Author
© Crown Copyright 2014.
A licence is needed to reproduce this article and has been republished
for educational / informational purposes only. Article reproduced by
permission of HM Revenue & Customs.
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Article Published/Sorted/Amended on Scopulus 2014-06-30 09:07:29 in Tax Articles