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Securities subject to banking ‘bail-in’

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Revenue and Customs Brief 24/2014 announces a change in HMRC’s policy concerning how the ‘special securities’ provisions of the corporation tax distributions rules (CTA 2010 part 23) apply to securities that are subject to the bail-in provisions which form part of the special resolution regime introduced by the Banking Act 2009.

The Financial Services (Banking Reform) Act 2013 inserted the ‘bail-in option’. It 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.

HMRC now accepts that for all securities (not just additional tier 1, AT1 and tier 2, T2) any possible change in terms triggered by an exercise of regulatory intervention powers is outside the scope of CTA 2010 s 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’.

HMRC also accepts that the potential application of the bail-in regime will not in itself make an instrument a non-commercial security within CTA 2010 s 1005 CTA10.

Additionally, the Taxation of Regulatory Capital Securities Regulations, SI 2013/3209, which apply since 1 January 2014, provide that payments in respect of AT1 and T2 instruments are not treated as distributions for the purposes of the Taxes Acts. The guidance deals with securities which do not fall within the scope of those regulations.