The draft Finance Bill 2013 includes a new "disguised interest" regime for income tax. In broad terms, disguised interest arises where a person receives amounts which are "economically equivalent to interest".
Changes have been made in the version of the Finance Bill published on 28 March from the earlier draft published in December 2012 to exclude certain shares listed on a regulated market from the disguised interest provisions. The effect of these changes is that existing EU listed Zero Dividend Preference shares (ZDPs) issued by funds before 6 April 2013 should be grandfathered and new ZDPs issued after that date should be excluded where, on issue, the holder is genuinely exposed to investment risk, and there are no subsequent arrangements to ensure an interest-like return (i.e. to remove any investment risk so that the return is essentially guaranteed).
Having discussed the changes with HMRC, we understand that HMRC do not expect standard ZDPs issued by split capital funds to be caught by these new rules.
In more detail:
The disguised interest rules will apply to arrangements that produce a return in relation to any amount that is disguised interest. Income tax will be charged if the return is not otherwise charged to income tax, unless the reason for this is because an exemption applies. To the extent the return would be charged to tax other than income tax, a claim may be made to HMRC for just and reasonable consequential adjustments to be made. The rule will be potentially applicable to arrangements under which an amount of "disguised interest" is paid and to which a person becomes party on or after 6 April 2013. An amount is "economically equivalent to interest" if:
- It is reasonable to assume that it is a return by reference to the time value of that amount of money;
- It is at a rate reasonably comparable to a commercial rate of interest; and
- At the time the person becomes party to the arrangement, or (if later) when the arrangement begins to produce a return for the person, there is no practical likelihood that it will cease to be produced in accordance with the arrangement (unless the person by whom it falls to be produced is prevented, by reason of insolvency or otherwise, from producing it).
There is now proposed an exemption for ‘excluded shares’ (provided the relevant shares are not linked to other arrangements). An excluded share is one that admitted to trading on an EU regulated market and is either issued before 6 April 2013, or is issued on or after 6 April 2013 and does not form part of any other arrangement that would produce a return that is economically equivalent to interest.