On March 23, 2021, the UK Government announced a public consultation focused on the clarification and reform of the UK’s tax regime for securitization companies.

Special corporation tax rules for securitization companies have existed since January 2005, with a “permanent regime” being introduced with effect from January 2007 under rules known as The Taxation of Securitisation Companies Regulations (the Regulations). The Regulations apply to companies involved in the securitization of financial assets and, in the years since 2007, have proved effective in facilitating a wide range of securitization transactions in the UK.

Periodically, the Regulations are considered by the UK Government to ensure that the securitization tax framework keeps pace with developments in financing transactions. The public consultation announced by the UK Government is an example of that ongoing process.

The consultation has focused on a number of discrete areas:

• Consideration is given by the Government to whether the Regulations effectively facilitate “retained securitizations,” where more than 50% of the securities issued by the securitization are not issued to third parties but are acquired or “retained” by the originator, possibly on a short-term basis. Such an arrangement can be problematic under the Regulations, which require that a securitization company must issue more than 50% of its securities to “independent (i.e., unconnected) persons.” The Government is seeking ways to overcome this problem.
• The Government is also seeking views regarding the requirement in the Regulations that only “financial assets” (a definition that excludes shares) can be held by a securitization company. This has been a common point of friction in many transactions, particularly where securities may be converted into shares (such as on a debt-for-equity swap). The Government’s flexibility in stretching the existing rules is constrained, however. Certain generous exemptions are available to securitization companies precisely because their investments are limited to financial assets; changing that position, and allowing shares to be held as collateral for securitizations, could result in the removal of those exemptions.
• One of the conditions of being a note-issuing securitization company is that, broadly, the value of the securities being issued, and representing the underlying collateral investments, should be at least £10 million. The Government has invited views on that threshold, including the possibility of the threshold being reduced and other companies being, as a result, inadvertently affected by the Regulations (which are mandatorily applicable).
• Finally, the Government is consulting on the stamp taxation treatment of the securities issued in securitizations, and the stamp taxation treatment of collateral transfers to securitization companies. A number of the stamp duty concerns raised by the Government in the consultation have cropped up in transactions for many years, and might be addressed with specific exemptions or adjusted HM Revenue & Customs guidance.

The consultation is to be welcomed. The issues being consulted on by the Government are all areas where the Regulations would benefit from reform.

There is, perhaps, a remaining concern that the VAT treatment of collateral servicing supplies made to securitization companies is not part of the public consultation. This remains a complex and potentially problematic area, requiring careful structuring on a transaction-by-transaction basis.

That being said, it would be unfair to be critical of a consultation which represents a glass that is at least half-full, rather than half-empty.