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Autumn Budget 2017: debt traded on a Multilateral Trading Facility (“MTF”)

Autumn Budget 2017: debt traded on a Multilateral Trading Facility (“MTF”)

  • United Kingdom
  • Tax planning and consultancy - Budget

22-11-2017

As part of Autumn Budget 2017, the Government has published a number of tax-related documents, including the “Overview of tax legislation and rates” (“OOTLAR”).

The OOTLAR restates the Government’s Spring Budget 2017 announcement that it will be legislating in Finance Bill 2017-2018 for the removal of the requirement to withhold tax on interest for debt issued on an MTF operated by a recognised stock exchange regulated in the European Economic Area.

Draft legislation was published on 13 September 2017 following a consultation exercise. The draft legislation includes a new exemption from withholding tax for interest on debt traded on a MTF and a widening of the definition of alternative finance investment bonds to include securities admitted to trading on an MTF.

New withholding tax exemption

At present, the key withholding tax exemption available in respect of listed debt is the Quoted Eurobond exemption, which involves listing bonds issued by UK companies on a recognised stock exchange.

The Quoted Eurobond exemption does not apply in respect of securities admitted to trading on an MTF in the UK because a UK MTF would not satisfy the requirement for the securities to be “listed” based on the UK’s listing rules. This puts UK MTFs at a competitive disadvantage to certain overseas MTFs where, based on local listing rules, the requirement to be “listed” is met.

To tackle this competitive disadvantage and put UK MTFs on an equal footing to overseas MTFs, the Government has introduced a new withholding tax exemption which involves expanding the Quoted Eurobond exemption to include securities admitted to trading on an MTF (this therefore circumvents the requirement to be “listed” under the current form of the exemption).

It is hoped that the introduction of this new MTF withholding tax exemption will help encourage UK companies to keep their debt capital markets work and therefore valuable fees for UK service providers in the UK.

The new withholding tax exemption is intended to apply in relation to interest payments made on or after 1 April 2018.

Widening definition of alternative finance investment bonds

In line with the decision to introduce a new withholding tax exemption relating to MTFs, as a result of a consultation exercise, the Government has decided to widen the definition of alternative finance investment bonds to include securities admitted to trading on an MTF.

Under existing law there are specific provisions to clarify the tax treatment of alternative finance investment bonds. These bonds are likely to be Shari’a compliant financial instruments known as ‘sukuk’. Under these provisions, if the arrangements are treated as alternative finance investment bonds they are treated for UK tax purposes as debt and the return on them as interest. However under current law, the arrangements require such bonds to be “listed” and therefore bonds traded on a UK MTF would not meet this requirement (because the UK listing rules do not allow for this). Again then, UK MTFs are placed at a competitive disadvantage to certain overseas MTFs which would treat bonds admitted to trading on them as meeting the listing requirement and therefore bonds traded on these overseas MTFs would be treated for UK tax purposes as alternative finance investment bonds.

The Government’s decision to widen the definition of alternative finance investment bonds to include securities admitted to trading on an MTF recognises the importance of falling within this meaning and the resulting certainty of UK tax treatment. This widening helps to avoid the need for market participants to undertake complex legal and tax analysis and helps prevent such bond issuers from unnecessarily using overseas MTFs when they could use a UK MTF instead. This change is a further step in line with the Government’s aim of achieving tax equivalence between alternative finance arrangements (and Islamic finance products falling within the meaning of such arrangements) and conventional debt.

The change will apply for corporation tax purposes for accounting periods beginning on or after 1 April 2018 and for income tax/capital gains tax purposes for the tax year 2018-2019 and subsequent tax years.

Please view our dedicated Autumn Budget 2017 hub here. It will give you access to our watch list, our contributors and relevant articles and tweets.

www.eversheds-sutherland.com/autumnbudget

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