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HMRC internal manual

Corporate Finance Manual

Debt cap: group accounts: the importance of accounting policies

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

Accounting policies followed in group accounts

The worldwide gross debt of a group, for the purpose of the gateway test, is calculated using figures for liabilities disclosed in the group’s consolidated balance sheet (see CFM90650). The measurement of these liabilities (and, in certain cases, whether they are recognised at all) will depend on the accounting policies under which the group accounts are prepared.

For example, a group that prepares consolidated accounts under International Financial Reporting Standards (IFRS) may have designated a particular liability as the hedged item in a fair value hedge of interest rate risk and, in accordance with IAS 39.89, or IFRS9.6.5.8, adjust the carrying amount of liability for gains or losses attributable to movements in interest rates. A group with a similar liability, hedged in a similar way, which prepared its consolidated accounts under different accounting policies might measure the liability at amortised cost.

In the same way, where the full rules need to be applied, computation of the available amount (CFM92400+) depends on amounts disclosed in the group’s financial statements and will therefore depend on the accounting policies adopted. Exact comparability between groups could be obtained by insisting that - specifically for UK tax purposes - amounts were computed using the same accounting standards applied in the same way. This would impose a very significant compliance burden.

As a compromise, TIOPA10/S347 requires the financial statements of the worldwide group to be ‘acceptable’. Acceptable financial statements include (but are not limited to) those prepared under IFRS, UK GAAP or US GAAP. CFM90440 sets out the full rules for financial statements to be ‘acceptable’, and CFM90450 explains the consequences if they are not.

Repeal of the debt cap rules

From 1 April 2017 the worldwide debt cap rules are repealed and replaced with the corporate interest restriction (CIR). 

Where consolidated financial statements are prepared for a period that straddles 1 April 2017, in applying the existing debt cap, the period of account will be treated as ending on 31 March 2017. The accounting policies used in the actual accounts are treated as having been used in the worldwide group period of account ending on 31 March 2017 - F(No.2)A17/SCH5/PARA26(5) - (7).

Guidance on the new rules on the CIR is available online at: