HMRC internal manual

Corporate Finance Manual

Debt cap: overview: background to the debt cap

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

The problems addressed by the debt cap rules

Most multi-national groups have external borrowings on which they pay interest and other costs of borrowing. The borrowings will range from multi-billion syndicated loans used to finance a major acquisition or takeover, to overdraft facilities used to help manage the cash flows of individual companies within the group. As well as external borrowings, a multi-national group will very often have borrowing arrangements between group companies.

The debt cap rules in effect limit the amount of debt on which the UK part of the group can claim relief for interest payments to the amount of consolidated gross debt of the group as a whole. However, the restriction is based on the internal and external funding expense, rather than the amount of debt.

At the very minimum the debt cap rules ensure that the UK members of the group can claim interest relief up to an amount equalling that external gross debt, even if the debt is not owed by the UK members of the group.

The debt cap measure is an objective test. There is no consideration of the purpose of the borrowing costs being claimed as deductions by UK members of the group.

The debt cap rules will broadly limit the finance expense in respect of net borrowing by the UK member of the group in the following situations:

  • Where a UK group arranges for most of its external debt to be borrowed by UK members of the group, and that debt is less than the intra-group debt borrowed by UK members of the group from overseas subsidiaries (commonly referred to as upstream loans).
  • Where a non-UK headed group arranges matters so that the UK part of the group borrows more net debt (typically intra-group debt) than the group has external debt. This can happen when the UK part of the group is highly leveraged.

The debt cap rules are not constrained by the arm’s length principle. The arm’s length principle is applied to intra-group debt before application of the debt cap. Just because the amount of net debt held by the UK members of the group is in line with the arm’s length principle, it does not mean the debt cap rules cannot apply.

The debt cap rules ensure that overall the UK part of the group will still receive relief in respect of external borrowing costs it incurs.

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 straddles 1 April 2017. See CFM93060 of the draft guidance for further details.