Does tax law regard your company as a "securitisation company"?

In the run up to the introduction of International Financial Reporting Standards (IFRS) and related changes in tax law, it was recognised that securitisation companies are critically dependent on an appropriate rating of their debt.  The Government accepted that if a rating agency was unsure of the potential tax liabilities of a securitisation company it may be unwilling to grant a rating.  Also; it may downgrade ratings previously granted to a securitisation company set up before IFRS came into effect.

Accordingly, in order to avoid disruption to the markets, the 2004 Pre-Budget Report included draft legislation that would allow securitisation companies (as defined) to continue to use UK GAAP as it stood on 31 December 2004 for another year for the purpose of computing their taxable profits, even if they prepared accounts under IFRS or revised UK GAAP.  This proposal has since been enacted as Section 83 Finance Act 2005.

Section 83 FA 2005 defines a securitisation company as being one of five types of company, one of which is a "note-issuing company".  That definition in turn has four conditions.  It must be a company that:

a) is party as debtor to a capital market investment,

b) the securities that represent the capital market investment are issued wholly or mainly to independent persons,

c) the capital market investment is part of a capital market arrangement, and

d) the total value of the capital market investments made under the capital market arrangement is at least £50m.

Capital market investment and capital market arrangement are defined by using section 72B(1) of the Insolvency Act 1986 and Sch 2A para 1, 2 and 3 to that Act.

Provided the four conditions are met, then the company in question should be a securitisation company.

The legislation does not then proceed to simply mandate the use of “old” (i.e. 2004) UK GAAP for tax purposes.  Instead, FA 2005 s.84 gives the Treasury power to make regulations which modify the corporation tax regime, specifically in its application to securitisation companies.  (No regulations have been published yet).  The powers in s.84 are very wide.  In particular, they allow (but do not require) the Treasury to make the special tax regime for securitisation companies elective.

My colleagues have recently been reviewing the definition of a securitisation company, and found that it is much wider than originally expected.  Apart from special purpose vehicles set up to own assets, one would also expect it to apply to the companies engaged in a whole business securitisation.  However, the elements of the definition that accommodate such companies have the consequence, presumably unintended, that many other companies are also included within the definition, quite possibly normal listed group companies that issue listed debt to finance their operations.  There is no substitute for checking the detailed definitions.

My main concern is the implications if the regime set out under the Regulations (when published) happens to not be elective.  With the present definition of a securitisation company, many companies that have organised their affairs for the new tax regime under IFRS/FRS 26 could find themselves being unexpectedly taxed under UK GAAP as it stood in 2004, with possibly very different tax consequences to those they expected.

The issue has been raised with HMRC.  Possibly the simplest way of dealing with the problem is to allow the tax regime under the Regulations, when published, to be elective as contemplated by s.84.  Meanwhile, companies should assess their own situation and if relevant make representations to HMRC.

Mohammed Amin