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HMRC internal manual

Corporate Finance Manual

Debt cap: overview: introduction

This guidance applies to worldwide group periods of account ending before (or straddling) 1 April 2017. 

A high level explanation of the debt cap measure

The principle of the debt cap measure is to limit relief for deductions in respect of excessive debt owed by UK members of a group. The measure applies whether the UK group companies are members of a UK or non-UK headed group. The amount of excessive debt is established by comparing the costs of borrowing, rather than snapshots of debt. The costs of borrowing are particular defined finance expenses.

The UK measure of borrowing costs (referred to as the ‘tested expense amount’) is the sum of the net finance deductions of the UK members of a group that are 75% subsidiaries of the ultimate parent of the group. Only UK companies, or UK permanent establishments, with net finance deductions are taken into account. The net finance deduction of any company is the aggregate of the financing expense amounts and financing income amounts that would otherwise be taken into account for the purposes of calculating corporation tax profits.

The worldwide measure of borrowing costs (referred to as the ‘available amount’) is the gross consolidated borrowing costs of the group as a whole. They are the finance expenses that are included in the group’s consolidated financial statements and will exclude intra-group transactions.

The tested expense amount is compared with the available amount and any excess is disallowed (referred to as the ‘total dissallowed amount’).

Where the group has UK members (that are members of the group for accounting purposes) that have net financing income, financing income can be exempted. The amount exempted will be the lower of the total disallowed amount and the tested income amount (the sum of the net financing incomes of each UK group company that has net financing income).

In many cases the total amounts disallowed and exempted are the same and there is no net impact on the group. However, where net UK finance expense is higher than a group’s external expense, the amounts disallowed will exceed the amounts exempted and the group will suffer a net disallowance. This can only happen where the UK members of the group are provided with finance by non-UK members. The debt cap cannot produce a net exemption for the group.

If the group has a net disallowance of financing expenses under transfer pricing rules (including adjustments arising from thin capitalisation), the net disallowance under the debt cap is reduced correspondingly. This is because any disallowances and exemption relate to the amounts taken into account for tax, which will already have taken account of any transfer pricing adjustments.

The costs of borrowing for both the UK and worldwide measures consist of interest, interest- like payments, ancillary costs of borrowing, finance charge element of finance leases and debt factoring costs.

The debt cap rules do not apply if the group does not satisfy certain gateway conditions, or if the group is almost wholly engaged in particular financial services. The rules only apply to groups that are large. There are a number of exclusions that limit the finance expense amounts and finance income amounts that are taken into account for the purposes of the debt cap rules.

There is no purpose test. The debt cap rules are an objective comparison of the net borrowing costs of the UK part of a group with the gross borrowing costs of the group as a whole. There are anti-avoidance rules to prevent groups frustrating the application and principles of the debt cap rules.

Commencement and repeal

Groups must apply the debt cap rules from the first period of account of the group that begins on or after 1 January 2010.

The debt cap was repealed by Finance (No.2) Act 2017 with effect from 1 April 2017 when it was superseded by the Corporate Interest Restriction.  Guidance on the new rules is available at:

Special rules apply where the period of account is straddling 1 April 2017. See CFM93060 of the dradt guidance for further details.