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HMRC internal manual

Corporate Finance Manual

Debt cap: overview: introduction

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.

The tested expense amount is compared with the available amount and any excess is disallowed.

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 up to the amount of the total disallowance.

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.

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.

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