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HMRC internal manual

Corporate Finance Manual

Debt cap: overview: commencement

{#IDA5FHID}This guidance applies to worldwide group periods of account ending before or straddling 1 April 2017.

Commencement and transitional provisions {#}

The debt cap legislation has effect for periods of account of the worldwide group that begin on or after 1 January 2010. For example, if the consolidated accounts of a group are prepared for a year ended 30 September 2011, the debt cap rules will apply to relevant group companies in the UK from 1 October 2010. Suppose that a particular UK company within that group prepares its accounts to 30 June. The debt cap will have no impact on that company’s corporation tax return for year ended 30 June 2010. The rules will apply to its accounting period ended 30 June 2011, although its financing expenses and financing income will not include any amounts arising between 1 July and 30 September 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The debt cap was repealed by Finance (No.2) Act 2017 with effect from 1 April 2017 when it was superseded by the Corporate Interest Restriction.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 straddles 1 April 2017. See CFM93060 of the draft guidance for further details.  

The commencement rules for the debt cap were subject to an anti-forestalling provision (see CFM90180).

TIOPA10/SCH9/PARA32 contains a transitional provision to deal with situations where loan relationships debits are allowed for tax purposes in a period later than that it which they are recognised for accounting purposes. The statutory provisions under which this can happen are

  • the ‘late interest’ rule in CTA09/S373 (CFM35810);
  • the rules under which debits representing discounts on deeply discounted securities are only brought into account on redemption if the creditor is a connected company (CTA09/S407) or the issuer is a close company (CTA09/S409) - see CFM37200; and
  • where debits relating to a change of accounting practice are being spread over 10 years under the Change of Accounting Practice Regulations, SI 2004/3271 (CFM76000).

In each of these cases, debits are not included as part of a company’s financing expense amount if, in the absence of the statutory rule concerned, they would have brought into account in an accounting period beginning before 1 January 2010.

Spreading under the Change of Accounting Practice Regulations may apply to credits as well as debits. In a similar way, any credits that would, in the absence of 10-year spreading, have been brought into account in a period beginning before 1 January 2010 do not form part of the financing income amount of a company.


A UK company borrowed money in year ended 31 December 2007 from a non-resident group company at an arm’s length rate of interest. No interest is, however, paid on the loan. Thus for years ended 31 December 2007, 2008 and 2009, no interest debits are allowed, in accordance with CTA09/S373.

The group company which is the creditor is not resident in a tax haven, so following the amendment to CAT09/S373 by FA09, interest could be deducted on an accruals basis. The company, however, elects under FA09/SCH20/PARA9(2) (CFM35970) for the ‘paid’ basis to continue to apply in its first accounting period beginning on or after 1 April 2009 - which is year ended 31 December 2010. Under the amended legislation, an accruals basis applies for tax purposes in year ended 31 December 2011. The whole of the interest arrears are finally paid in 2012.

The worldwide group to which the company belongs also prepares accounts to 31 December, so the UK company must apply the debt cap rules in year ended 31 December 2010. Its position in computing its financing expense amounts is as follows:

Year ended 31 December 2010: no debits relating to interest on the loan are brought into account, so there is no financing expense amount within TIOPA2010/S313(2) in respect of that loan.

Year ended 31 December 2011: interest is brought into account on an accruals basis, and is a financing expense amount.

Year ended 31 December 2012: the interest which accrued in 2007, 2008 and 2009, and which is now paid, will be deductible for tax purposes. But, absent the ‘late interest’ rule, these amounts would have been deducted in periods beginning before 1 January 2010. The TIOPA2010/SCH9/PARA32 transitional rule means that the resultant debits are not a financing expense amount of the company.

The interest which accrued in 2010 will also now be deductible. The transitional rule does not apply to these debits, because they did not accrue in a period beginning before 1 January 2010, and accordingly they form part of the financing expense amount for year ended 31 December 2012, along with those debits representing the interest accrued in 2012.