On 9 December 2015, draft legislation for the Finance Bill (FB) 2016 was published. Key measures which are likely to be of interest include:

  • hybrid mismatches
  • measures to improve business tax compliance
  • taxation of carried interest.

Draft legislation to introduce the new apprenticeship levy, for companies with a payroll over £3m, will be published in early 2016.

Hybrid mismatches

The draft FB 2016 legislation follows the government’s 2015 consultation on this area, in light of the OECD’s recommendations as part of the BEPS project (Action 2). The stated aim of the new rules is to tackle “aggressive tax planning” by use of complex cross-border investment by multinational groups.

The new rules will apply to payments made on or after 1 January 2017 and which involve a “hybrid” entity (eg a partnership treated as tax transparent by one jurisdiction, but opaque by another) or a “hybrid” financial instrument (eg one allowing an interest deduction for the payer, but an exempt dividend in the hands of the payee), or a dual-resident company. The effect of the rules is to change the tax treatment of either the payment, or the receipt.

Unsurprisingly, the draft legislation is lengthy and complex (running to nearly 50 pages). Draft examples as to how the legislation might apply, published on 22 December 2015, themselves run to a further 85 pages.

In summary the new rules target two types of “mismatch”:

  • “mismatches” giving rise to a double deduction for the same expense. These arrangements involve hybrid entity payers or dual-resident companies. Here the UK will deny the deduction where the parent is a UK entity (the “primary” response) or, if that is not possible, deny the deduction for the UK hybrid (the “secondary” response)
  • “mismatches” giving rise to deductions without any corresponding taxable receipt. These arrangements can involve hybrid instruments as well as hybrid entity payers or payees. In these cases, under the new rules the UK will disallow the deduction if the payer is a UK entity (the “primary” response). Alternatively, the UK may tax the payment receipt (the “secondary” response).

The draft legislation and examples can be found here.