Market leading insight for tax experts
View online issue

Reader feedback: Have ordinary loans really become surprise hybrids?

printer Mail

The conclusion reached by Dan Neidle and Jemma Dick in their article ‘How ordinary loans become surprise hybrids’ (Tax Journal, 29 September 2017) does seem to give rise to an unsatisfactory result.

HMRC’s guidance in its International Manual at INTM559230 also appears to imply that the ‘control group’ threshold may be triggered by sufficiently material plain vanilla lending. The guidance goes on to give some comfort that a plain vanilla loan may not be regarded as part of a relevant ‘over-arching arrangement’ and so may sidestep the imported mismatch rules for that reason. However, this conclusion sits slightly at odds with the example of a typical ‘series of arrangements’ earlier in that same guidance (which seems to imply that where one loan finances another, they would generally be regarded as part of the same over-arching arrangement). Ideally, taxpayers and advisers would not have to resort to placing a material amount of reliance on this guidance (particularly in light of the recent case of Aozora [2019] EWCA Civ 1643).

We have come across this point several times in recent practice and have wondered whether there is a viable statutory interpretation of the ‘50% investment’ test in TIOPA 2010 s 259ND(4) (the problematic subsection) which would remove plain vanilla lenders from the ambit of the control group test.  

Our view is that we may be required to read the word ‘distribution’ in s 259ND(4)(a) and (b) (in a case where Q is a company) in accordance with CTA 2010 s 1000 (which applies for the purposes of the Corporation Tax Acts that includes TIOPA 2010). If so, it seems that a lender under a plain vanilla loan should not, by virtue of the rights under the loan itself, be regarded as having any relevant investment in the company in question (as a plain vanilla loan would not normally give the lender any rights to ‘distributions’).

In considering this interpretation, we have made the following observations: 

  • There are a few other places in the corporation tax legislation where ‘distribution’ may need to be interpreted differently. Examples include where the wording reads ‘available for distribution among equity holders’ or ‘available for distribution among participators’ and the terms ‘equity holders’ and ‘participators’ are defined as including persons with different rights from those entitled to s 1000 distributions. In our view, the addition of a specific class of defined recipients would likely require a different interpretation of ‘distribution’ in the relevant contexts. 
  • TIOPA 2010 s 371RB(2) contains almost identical wording to s 259ND(4). The Parliamentary debate and explanatory note from the time that ICTA 1988 s 755D(1A) (rewritten as s 371RB(2)) was introduced indicates that the focus was on ‘distributable profits’. This section was introduced ‘to counter a number of avoidance schemes where groups claim to be able to enjoy all the benefits of ownership of a controlled foreign company without being regarded as controlling that company under the existing definition’ (emphasis added).
  • Our view is that s 371RB(3) and HMRC’s CFC guidance relating to banks in INTM236250 can be read consistently with this interpretation: the guidance generally refers to companies coming to be ‘owned’ by relevant banks or to banks having shares in the company (and the impact of this on the test for the other shareholders). 
  • If s 259ND(4)(b) was supposed to be a wider ‘entitlement to more than 50% of gross-assets test’ (i.e. was supposed to catch trade creditors/finance providers whose debt represented more than 50% of the company’s assets at any one time), there would have been no need for the limiting words ‘available for distribution’; the drafting could have stopped at ‘assets’. 
  • The fact that a distribution in respect of share capital in a winding-up is not a distribution for the purpose of the corporation tax Acts (CTA 2010 s 1030) does not seem fatal to the argument that ‘distribution’ in s 259ND(4)(b) should be read with the s1000 meaning. To the extent that a person owns sufficient share capital they would likely already be caught by s 259ND(3). Also, s 259ND(4)(b) is wider than distributions on a winding up (there is an ‘or in any other circumstances’ extension) and not all s 1000 ‘distributions’ on a winding up would necessarily be in respect of share capital.
  • We would have thought that the word ‘distributions’ in TIOPA 2010 s 371VH(2)(b) would generally be interpreted as taking its CTA 2010 s 1000 meaning. 

As far as we are aware, the interpretation outlined above may not have generally been adopted by UK tax advisers. We should be grateful for others’ views on this point. 

Sophie Donnithorne-Tait, Akin Gump Strauss Hauer & Feld ( 

Further views:

We agree with Sophie that it is not ideal to rely on guidance in order to get comfortable that a plain vanilla loan is not caught by the imported mismatch rules, but we think that is where we probably still are. We find the technical arguments for a s 1000 interpretation of ‘distribution’ intriguing, but fear that the ‘investment’ test at s 259ND was probably intentionally left broad. In particular, two points immediately come to mind. First, HMRC clearly wanted to keep open the possibility that a plain vanilla loan could lead to a 50% investment interest: the changes to INTM559230 in the final guidance in respect of ‘over-arching arrangements and third party borrowings’ proceed on the basis that a lender may have a 50% investment interest in a borrower solely by virtue of a loan. Second, when it drafted the anti-hybrid rules it was open to HMRC to exclude lenders under normal commercial loans, just as it did for the 25% investment test in the corporate interest restriction rules (see TIOPA 2010 s 464). 

Dan Neidle & Jemma Dick, Clifford Chance

I have not come across this issue in practice, but I would tend to agree with Sophie’s interpretation. The reference in s 259ND(4) to ‘assets … available for distribution’ means, in my opinion, net assets. The concept of a ‘distribution’ and ‘assets available for distribution’ is used repeatedly in the Corporation Tax Acts and the Companies Act, and while its meaning it not always consistent, it is always understood to refer to the distribution of surplus assets over and above those needed to settle any liabilities. 

If we assume that the analysis in the original article is correct and apply it to the example in the original article, it leads to some surprising conclusions. Repaying a sufficient proportion of either loan to bring the total below 50% of WidgetCo’s enterprise value would take it out of the scope of the hybrid rules. So would a revaluation of WidgetCo’s IP and real property if it achieved an equivalent result of bringing the loans below 50% of the gross asset value of the company. I cannot see any policy reason why this should be intended. It may be argued that this is yet further evidence of the inadequacy of the rules as they stand, but I would suggest that it is instead evidence that the interpretation in the original article is not correct. 

James Ross, McDermott Will & Emery 
Issue: 1466
Categories: In brief