Clarifying Residual Payments not subject to WHT: Budget 2016

Tucked away in the Budget 2016 announcements was a potential helpful development for the securitisation industry, which will eventually clarify that residual payments by UK securitisation companies are not subject to UK withholding tax.

Any excess cash remaining to a UK securitisation company at the bottom of its “waterfall” of payment obligations is typically payable to the originator or seller as deferred purchase price for the securitised assets. These are referred to as “residual payments” and on some transactions, the rights to these are represented by “residual certificates” which can be cleared through the clearing systems to make them more readily transferable. Parties regularly dealing with securitisations will be aware that such residual payments have typically been treated as not being subject to UK withholding tax rules (on the basis that they are neither “interest” nor “annual payments” for UK tax purposes). But that there has been a degree of uncertainty regarding the analysis that they are not “annual payments”, particularly in the context of assignment of residual certificates / residual payments to a party other than the originator or other seller who sold the securitised assets into the securitisation SPV. On many transactions, this has lead parties to seek rulings from HMRC to confirm that the residual payments on that particular transaction do not constitute “annual payments” for UK tax purposes and hence are outside the scope of UK withholding tax rules. Such rulings are typically given by HMRC, but applying for and obtaining such HMRC rulings involves additional process, cost and potential delays that are outside the parties’ control. One must imagine that from HMRC’s perspective, providing the rulings is also a demand on its resources which does not produce additional tax revenue.

Budget 2016 announced that the UK withholding tax treatment of residual payments by UK securitisation companies will be clarified … eventually. Ultimately the Government will legislate to put it beyond doubt that residual payments by UK securitisation companies will not be subject to the UK withholding tax rules on “annual payments”. But unfortunately the process of getting there seems convoluted. Finance Bill 2016 will create power to introduce regulations to address the point. (Existing authorisation to implement regulations on securitisation companies applies only to corporation tax, whereas withholding tax is technically a form of income tax rather than corporation tax!) There will then be a consultation on the form of regulations to be introduced under this power before the regulations are implemented. So it is likely to take some time before the change is finally enacted.

When the change is eventually in force, it should not ultimately change the structuring or tax position of UK securitisation companies, and deferred purchase price, residual payments and residual certificates are all expected to continue as before. What it hopefully will do, is help streamline the process on the tax side, particularly in relation to provision of tax opinions on UK securitisations. Putting beyond any doubt that residual payments are not subject to the annual payments withholding tax rules, will remove any question of HMRC rulings being needed for tax opinions to be given to this effect, and hence save the process, costs and delays for parties implementing a securitisation that have often occurred to date (as well as freeing up the HMRC resource currently needed to provide the rulings).