After consulting with banks and other stakeholders on the tax implications of the impending withdrawal of LIBOR and similar interest rate benchmarks, HMRC published guidance for businesses and individuals in November 2020. The guidance was published together with draft legislation that has now been introduced in FA 2021.
HMRC’s guidance addressed many of the issues identified as arising from the process of restructuring financial instruments to transition from LIBOR to a new reference rate. These included, in particular, the question as to whether changes to contracts would be regarded as mere variations, or as a rescission of one contract and the creation of a new one. In summary, the guidance concludes that if the parties to a contract agree to change the terms for the purposes of responding to the withdrawal of LIBOR, this would normally be viewed as a variation. The amended contract should be regarded as the same contract and entered into at the same time as the original one.
This left two items to be addressed in the Finance Act. First, it was necessary to replace references to LIBOR in existing tax legislation. A small number of them exist in the context of leases, and the Act (in s 132) replaces them, with effect from 1 January 2022, with a reference to ‘the incremental borrowing rate’. The incremental borrowing rate is a concept used for lease accounting purposes which seeks to identify the interest rate implicit in a lease.
Second, it was necessary to recognise that as the transition from LIBOR is actually implemented across the trillions of dollars of affected financial instruments, it is quite possible that unanticipated issues might come to light and need to be addressed. The explanatory notes to the Finance Bill describe the objective of what is now s 133 as giving the Treasury a time limited power to make regulations to address any unintended issues that arise from the transition. Regulations made under s 133 are capable of having retrospective effect and of providing a broad range of solutions to change the tax treatment of transactions and amounts, in each case with the ability for taxpayers to elect out of them.
Enacting a provision that contemplates tidy up changes in recognition of uncertainties arising from complex financial instruments is reminiscent of legislation enacted in FA 2019 which included a time limited power for the Treasury to make amendments to the definition of ‘hybrid capital instrument’. That power was used to good effect and, given HMRC’s apparent willingness to assist taxpayers in this context, it is quite possible that the powers relating to LIBOR transition also will be used if fresh issues are identified. The keen-eyed reader will have noticed that the time period for making regulations was extended to 31 December 2023 from the original date of 31 December 2022 set out in the first draft of the legislation.
After consulting with banks and other stakeholders on the tax implications of the impending withdrawal of LIBOR and similar interest rate benchmarks, HMRC published guidance for businesses and individuals in November 2020. The guidance was published together with draft legislation that has now been introduced in FA 2021.
HMRC’s guidance addressed many of the issues identified as arising from the process of restructuring financial instruments to transition from LIBOR to a new reference rate. These included, in particular, the question as to whether changes to contracts would be regarded as mere variations, or as a rescission of one contract and the creation of a new one. In summary, the guidance concludes that if the parties to a contract agree to change the terms for the purposes of responding to the withdrawal of LIBOR, this would normally be viewed as a variation. The amended contract should be regarded as the same contract and entered into at the same time as the original one.
This left two items to be addressed in the Finance Act. First, it was necessary to replace references to LIBOR in existing tax legislation. A small number of them exist in the context of leases, and the Act (in s 132) replaces them, with effect from 1 January 2022, with a reference to ‘the incremental borrowing rate’. The incremental borrowing rate is a concept used for lease accounting purposes which seeks to identify the interest rate implicit in a lease.
Second, it was necessary to recognise that as the transition from LIBOR is actually implemented across the trillions of dollars of affected financial instruments, it is quite possible that unanticipated issues might come to light and need to be addressed. The explanatory notes to the Finance Bill describe the objective of what is now s 133 as giving the Treasury a time limited power to make regulations to address any unintended issues that arise from the transition. Regulations made under s 133 are capable of having retrospective effect and of providing a broad range of solutions to change the tax treatment of transactions and amounts, in each case with the ability for taxpayers to elect out of them.
Enacting a provision that contemplates tidy up changes in recognition of uncertainties arising from complex financial instruments is reminiscent of legislation enacted in FA 2019 which included a time limited power for the Treasury to make amendments to the definition of ‘hybrid capital instrument’. That power was used to good effect and, given HMRC’s apparent willingness to assist taxpayers in this context, it is quite possible that the powers relating to LIBOR transition also will be used if fresh issues are identified. The keen-eyed reader will have noticed that the time period for making regulations was extended to 31 December 2023 from the original date of 31 December 2022 set out in the first draft of the legislation.
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