The Taxation of Securitisation Companies Regulations 2006 (SI 2006/3296) came into force at the beginning of this year, delivering a new permanent regime for the taxation of securitisations in the United Kingdom.

The primary aim of the Regulations is to solve problems brought about by the introduction of International Financial Reporting Standards (IFRS) in January 2005 and the associated changes to United Kingdom generally accepted accounting practice (GAAP).

The broader effects of this new regime, however, seem equally noteworthy. The Regulations not only provide a bespoke and simplified taxation system for most securitisations, but also remove historic problems with the application of certain of the United Kingdom’s taxation rules.


A securitisation SPV is essentially a cash conduit for returning income on the underlying assets to investors in the form of interest on securities. Its cash flows broadly match and it is therefore critical to the rating of its loan notes, and the success of the transaction structure, that the SPV suffers no unexpected tax liabilities which might affect its ability to return interest to its bondholders.

Broadly speaking, the United Kingdom takes the approach of taxing all companies according to their statutory accounts, a trend which has, in recent years, been increasingly supported by highly specific accounts-based tax legislation in a number of areas.

Under "old" GAAP, it was usually possible to provide a clean opinion that the securitisation vehicle would be taxed in each period on its commercial profit. Admittedly, though, there were often difficulties with the application of parts of the United Kingdom’s corporation tax code (e.g., the denial of deductions for results-dependent interest—as to which see further below) resulting in some structures being placed overseas.

The widespread accounting changes in January 2005, however, had the real potential to distort securitisation companies’ annual accounting (and, thus, taxable) profits.

The application of IFRS, and in particular IAS 39, would likely result in an uneven pattern of profits and losses year by year. Although debt, assets and liabilities would match each other economically over the life of the securitisation, they would not necessarily match in the accounts in each year. This volatility would adversely affect credit ratings and could lead to situations where a securitisation company had substantial taxable profits in a particular accounting period, giving rise to corporation tax liabilities that the company would have been unable to meet out of its commercial profits without adversely affecting bondholders.

In light of representations from the securitisation industry about the problems posed by this shift in accounting standards, the following remedial measures were adopted by the United Kingdom legislature.

First, the Finance Act 2005 introduced a temporary solution which permitted a defined category of "securitisation companies" to ignore the changes brought in by IFRS in computing their corporation tax liabilities and to continue to apply "old" UK GAAP. This temporary regime was initially to expire on 31 December 2006, but has since been extended to 31 December 2007.

Secondly, the Government began consultation on a permanent solution to the problem presented by the shift to IFRS, resulting in the Regulations which were introduced at the end of 2006 with effect for accounting periods beginning on or after 1 January 2007.

The Regulations

The aim of the new rules is straightforward: to tax securitisation companies on their actual cash profit, rather than on the accounting profit (which as described above might vary considerably from period to period).

To do this, the Regulations effectively disapply much of the United Kingdom’s corporation tax code for computing the taxable profits of a securitisation company in favour of a simplified formula. The Regulations are therefore diametrically opposed to almost all the United Kingdom’s recent tax legislation in other areas which (as noted above) generally seeks to bring the tax treatment of companies directly into line with the statutory accounts.

The legislation, which is currently supplemented by more than 30 pages of HM Revenue & Customs (HMRC) draft guidance notes, sets out various definitions and conditions which seek to ensure that a "securitisation company" satisfying the "payments condition" will be subject to corporation tax only on its "retained profit".

These defined terms are critical to the operation of the Regulations and are worthy of further consideration.

Securitisation Company

There are five categories of company that will qualify as a securitisation company. Of those, the "note-issuing company" is likely to be the most important in practical terms.

A company will be a note-issuing company where it satisfies a number of conditions, including the following:

  • It must be a party as debtor to a "capital market investment" where securities are issued as part of a "capital market arrangement", being an arrangement which involves the issue of rated securities to third party investors and which are traded on a recognised stock exchange.
  • The total value of the capital market arrangement must be at least £10 million.
  • The company’s only business (apart from issuing the securities mentioned above, and other incidental activities) must be acquiring, holding and managing "financial assets", or acting as guarantor of certain liabilities.
  • Aside from a note-issuing company, the four other types of qualifying securitisation company, as specifically defined in the Regulations, are: 
    • an "asset-holding company"
    • an "intermediate borrowing company"
    • a "warehouse company"
    • a "commercial paper funded company"

Qualifying companies generally have an extremely limited ability to hold assets which are not financial assets. ("Holding" here refers to beneficial ownership, as a matter of law.) Financial assets has the meaning it has for GAAP purposes but also includes derivatives contracts within Schedule 26, Finance Act 2002 and excludes shares (other than shares in a securitisation company which is party to the capital market arrangement).

In general the Regulations will therefore apply to securitisations of mortgage, credit card and similar financial receivables. However, as acknowledged in HMRC’s draft guidance, payment rights under non-financial assets will, in practice and if acquired separately from the remainder of the contract, be treated as financial assets for the purposes of the Regulations, thus capturing other types of securitisations such as trade-receivable financing.

These tests are applied on an accounting-period-by-accounting-period basis.

Payments Condition

Once it is established that you have a securitisation company, the next question is whether the payments condition is and has always been satisfied. This is critical. If the payments condition is failed at any point in time, the special corporation tax charge will not, and will never, apply to that company, which would go back to being taxed by reference to its accounts.

The payments condition requires that the company must pay out within 18 months all amounts that it has received in an accounting period, except for amounts needed to be retained to provide for losses or expenses of the business, or to enhance creditworthiness, or the retained profit of the securitisation company for the period.

Retained Profit

If the securitisation company satisfies the payments condition, it will be subject to tax on its retained profit.

This is the amount required by the securitisation to be retained or designated as the profit of the securitisation company. In essence, this will be a very small amount required to be retained year by year in order to show corporate benefit, usually expressed as a percentage of asset value, funding or annual income or a specific amount.

Other Points

Distribution legislation: A number of corporation tax rules are "switched off" in relation to securitisation companies which are to be taxed on their retained profit. Amongst those rules that are disapplied is the rule that interest which is dependent on the borrower’s results is not tax-deductible. HMRC has long maintained that interest on a non-recourse loan is dependent on results for these purposes and should therefore be treated as a non-deductible distribution. In the past, this has caused problems for securitisation vehicles in the United Kingdom, which for rating reasons often include this type of debt. This rule is now disapplied (as is certain other distribution legislation which can otherwise prove problematic).

Anti-avoidance: The Regulations contain a specific anti-avoidance provision, requiring that the securitisation be entered into for business purposes without having United Kingdom tax avoidance as a main purpose of the arrangement. Failure of the anti-avoidance test results in disapplication of the special corporation tax charge forever.

Existing securitisation companies: A company that is already a "securitisation company" before 1 January 2007 must elect into the Regulations within 18 months of the end of the first accounting period beginning on or after 1 January 2007. The election is irrevocable.


The Regulations have now been in force for a little more than four months, and while the new regime is very much in its infancy, initial signs are that it has been well received by industry. There are also likely to be continuing modifications to the Regulations in order to adapt the rules to a fast-changing market and to include areas not presently covered by the Regulations.

Time will tell whether the new rules will result in an increased volume of securitisation activity within the United Kingdom. There are still other areas of the United Kingdom’s tax regime which can prove problematic for securitisation structures (such as value-added and stamp taxes). However, when one takes into account the United Kingdom’s wide network of double taxation treaties, the new regime is likely to go some way to attracting new securitisation business to this jurisdiction.