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HMRC internal manual

Corporate Finance Manual

Debt cap: groups affected: relevant group companies

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

What is a relevant group company?

Relevant group companies are those group companies whose combined net financing deductions are compared with the gross financing expenses of the worldwide group under the debt cap rules. The net financing deductions of UK group companies (see CFM91200+) are not taken into account in determining whether there will be any disallowance under the debt cap measure.

In addition, it is only the results of relevant group companies that are relevant to the following provisions of the debt cap measure:

  • the gateway test in TIOPA10/S261 (see CFM90600+); and
  • the exclusion for financial services groups in TIOPA10/S266(see CFM90800+).

A relevant group company is defined in TIOPA10/S345 as a UK resident company or a company with a UK permanent establishment that meets any of the following conditions:

  • The company is a 75% subsidiary of the ultimate parent (see CFM90270);
  • The ultimate parent is beneficially entitled to at least 75% of the profits available for distribution to equity holders of the company; or
  • The ultimate parent would be beneficially entitled to at least 75% of any assets of the company available for distribution to equity holders on a winding up.

The way in which these rules are applied was modified, with effect for worldwide group periods of account stating on or after 5 December 2013 by FA14/S39.

Periods of account beginning before 5 December 2013

The meaning of 75% subsidiary was not defined in the debt cap measure and so took the general Taxes Act meaning given at CTA10/S1154(3)

CTA10/PT5/CH6 applied in relation to determining whether the ultimate parent was beneficially entitled to at least 75% of the profits available for distribution or assets on a winding up in the same way that it applies for the purposes of the group relief rules at CTA10/S151(4) (see CTM81000 onwards).

Because only one of the three conditions above needs to be satisfied, a UK company may be a relevant group company even though it is not a member of the ‘group relief group’.

Although an overseas company with a UK permanent establishment can be a relevant group company, it will only be the financing expenses and income of the permanent establishment that are taken into account under the debt cap measure. This is because the measure of financing expenses and income in the debt cap rules is based on those amounts that are brought into account for UK tax purposes.

Periods of account beginning on or after 5 December 2013

FB2014/S39 made changes to the way a 75% subsidiary is defined and to the way in which the provisions of CTA10/PT5/CH6 are applied for the purposes of the debt cap. The changes put it beyond doubt that ownership and beneficial entitlement to profits and assets can be traced to and through entities that do not have ordinary share capital.