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HMRC internal manual

Corporate Finance Manual

Debt cap: group accounts: deriving amounts from consolidated financial statements

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

Amounts disclosed in financial statements

When applying the gateway test, it is necessary to quantify the ‘relevant liabilities’ of the worldwide group at the end of each period of account (CFM90650). Likewise, when considering the available amount, it is necessary to work out the aggregate of the interest and interest-like amounts specified in TIOPA10/S332(1).

In the majority of cases it will not be possible simply to read the requisite figures from the face of the published accounts. For example, the line for finance costs in a group income statement is likely to contain not only the interest and similar costs set out in S332(1), but also such things as exchange differences on borrowings, fair value movements on any liabilities being measured at fair value, and dividends on preference shares or similar instruments that are classified as financial liabilities. At the very least regard needs to be had to analyses given in the notes to the accounts, and generally some further insight into how the accounts figures are made up will be necessary.

The legislation allows for this: TIOPA10/S349(1) specifically provides that references to amounts disclosed in financial statements include an amount that is comprised within a figure disclosed in the accounts. This applies both to consolidated and individual company accounts.

Amounts in accounts that are disregarded

TIOPA10/S349(2) and (3) set out two specific situations in which amounts shown in the accounts are disregarded.

The first exception applies only where you are looking at interest and other financing costs in order to compute the available amount. Interest, or other financing costs included in TIOPA10/S332(1)(a) to (g) on borrowings to fund a fixed capital asset or development project may be taken to the balance sheet and treated as part of the cost of an asset. The expense will only affect the company’s profit or loss in a later period, either as the asset is depreciated or when it is sold. In such a case, the interest or other costs are included in the available amount for the period in which they are taken to the balance sheet. Any subsequent release to the income statement is disregarded.

The second exception applies to amounts disclosed in either the group accounts of a worldwide group or in individual company accounts. Amounts taken into account for tax purposes do not include

  • any amount disclosed in respect of a group pension scheme - so where for example interest paid by a pension scheme is, in accordance with GAAP, disclosed in the accounts of the employer group it is ignored for debt cap purpose; or
  • any amount disclosed in respect of an entity that is not a member of the worldwide group.

It should be noted that amounts disclosed in accounts and described as interest or liabilities will also be left out of account in operating the gateway test or computing the available amount if they do not fall within the relevant statutory descriptions in TIOPA10/S264(2) (‘relevant liabilities’, see CFM90710) or S332(1) (‘available amount’, see CFM92410).

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, a worldwide group period of account will be treated as ending on 31 March 2017. So long as the accounting policies used in the actual accounts are acceptable, the financial statements treated as having been used in the worldwide group period of account ending on 31 March 2017 are treated as having drawn up under those standards- F(No.2)A17/SCH5/PARA26(5) and (6).

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

https://www.gov.uk/government/publications/corporate-interest-restriction-draft-guidance