Hybrids and cash tax risk

20 October 2017

The new hybrid mismatch rules have been effective since 1 January 2017 to target what HMRC describes as ‘aggressive tax planning’. As with any new legislation, there is inevitably some question about how the law will operate. The draft guidance issued by HMRC offers some direction on this, but it is apparent that there continues to be a far greater level of uncertainty as to how these rules will be applied than would typically be expected with new legislation.

Clearly, this leaves many international groups in the unenviable position of applying complex new rules with potentially material adjustments at stake.


The rules aim to neutralise the UK tax benefit of arrangements whereby a UK entity otherwise receives a UK tax deduction for an expense but another tax jurisdiction either does not tax the corresponding receipt or allows a deduction for the same expense. Such outcomes typically rely on:

  • Hybrid entities – a common example would be an entity which is considered opaque (ie the entity is taxed on its profits) under the tax laws of jurisdiction A, but transparent (ie the entity’s owners are taxed on its profits) under the tax laws of jurisdiction B.A UK subsidiary of a US group where the UK company is the subject of a US ‘check the box’ election, such that it is treated as a branch of its US parent company for US tax purposes, is a good example.

    The rules will also apply where, very broadly, the counterparty to any deduction claimed by that UK company is transparent under local tax law – a German KG, or a US LLC, or a Dutch CV/BV structure for example.

  • Hybrid instruments – an instrument which is, for example, considered to be debt in jurisdiction A, but equity in jurisdiction B such that there would be deductible interest expense in jurisdiction A, but a non-taxable distribution in jurisdiction B.

The challenge for the taxpayer

The new legislation does not:

  • apply a de minimis threshold;
  • provide for a commercial motive exemption; or
  • have any grandfathering provisions.

Where the rules apply, the taxpayer will have to work through complex details of the law, to understand whether there will be additional taxable income in the UK or whether the challenge can be mitigated within the legislation.


UK entities that are part of multinational groups, need to review all intra-group transactions now, to ascertain whether they may be caught by these new rules and understand the impact on their UK tax liability. It must be remembered that the rules don’t just impact debt instruments - any type of intra-group payment is potentially caught.

Once the transactions that potentially impact a taxpayer’s position are understood, it may be possible to approach HMRC for a ruling on whether the rules apply to their specific fact pattern, in order to obtain certainty of treatment.

For more information and assistance in considering how the hybrid mismatch rules impact your business, please get in touch with Suze McDonald, Peter Coe or your usual RSM contact.