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HMRC internal manual

Corporate Finance Manual

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HM Revenue & Customs
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Debt cap: overview: international accounting standards

The common standard of reference for UK-headed and foreign headed groups

The debt cap compares the net finance expenses of the UK members of a group (the tested expense amount) with the gross finance costs of the group as a whole (the available amount). The tested expense amount is calculated using amounts that would otherwise be taken into account in calculating corporation tax. By contrast the available amount is calculated by reference to amounts contained in the consolidated financial statements of the group. The rules apply to both UK and non-UK headed groups and so a common standard of reference is needed to ensure that groups preparing financial statements using different accounting standards are treated the same for the purposes of the debt cap rules.

The common standard used is International Accounting Standards (IAS). The term IAS has three different meanings

  1. IAS are accounting standards developed by the International Accounting Standards Committee (IASC). The International Accounting Standards Board (IASB) replaced the IASC in 2001 and adopted all the standards then in force. The IASB carried on the work of developing internationally accepted accounting standards, but new standards developed and adopted by the IASB are called International Financial Reporting Standards (IFRS).
  2. Section 50(2) FA 2004 explains that in the Corporation Taxes Acts ‘international accounting standards’ has the same meaning as in Regulation (EC) No. 1606/2002 of the European Parliament and the Council of 19 July on the application of international accounting standards. Section 50(3) FA 2004 applies the international accounting standards with necessary modifications as laid down by the EC in respect of generally accepted accounting practice.

Article 2 of Regulation (EC) No. 1606/2002 says ‘international accounting standards’ shall mean International Accounting Standards (IAS), International Financial Reporting Standards (IFRS) and related interpretations (SIC IFRIC interpretations), subsequent amendments to those standards and related interpretations, future standards and related interpretations issued or adopted by the International Accounting Standards Board (IASB). 

  1. Article 3 of that Regulation allows the European Commission to decide which international accounting standards can be sanctioned for use within the EC. These standards are IAS that are EC conformant.

The term ‘international accounting standards’ is not defined in TIOPA10/Part 7 and so takes its meaning from CTA10/S1127, which is the ‘global’ IAS standard, not the EC conformant IAS standards. So for the purposes of the debt cap measure IAS means IAS, IFRS and related interpretations, future standards and related interpretations issued or adopted by the International Accounting Standards Board (IASB).