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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 Exchequer intervention.

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.

Original 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).

Current view

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 prospectus.

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 Directive 4”.

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© Crown Copyright 2014.

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Article Published/Sorted/Amended on Scopulus 2014-06-30 09:07:29 in Tax Articles

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