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HMRC internal manual

Corporate Finance Manual

Debt cap: gateway test: introduction

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

An outline of the gateway test

The gateway test rules are contained in TIOPA10/PT7/CH2 (S261 to 273A). The test is designed as an approximation to the main rules, and is intended to exclude the majority of groups who would find they had no disallowance if they were to apply the calculations within the rest of Part 7. A group only has to perform the computations if it ‘passes through the gateway’ because its UK net debt, as defined, exceeds 75% of its worldwide gross debt – TIOPA10/S261(1). Like the main rules the gateway test applies to accounting periods beginning on or after 1 January 2010.

The gateway test is not optional - the only circumstance in which a large group will not have to consider it is if it is already excluded for the period as a qualifying financial services group (CFM90800). Every ‘worldwide group’ (see CFM90220) has to check whether it meets the test set out in TIOPA10/S261.

The test works in a negative way. If the UK net debt of the group (see CFM90630) exceeds 75% of worldwide gross debt of the group (see CFM90660) then Part 7 applies to the group. Where this condition is met, the group must go on to test whether the tested expense amount for the group exceeds the available amount for the group.

In computing the UK net debt of the group, the net debt for each UK group company is computed separately and if a company has an excess of relevant assets over relevant liabilities, its net debt is treated as zero, rather than a negative amount. This can result in the UK net debt being significantly larger than it would be if the assets and liabilities of all of the companies were totalled separately before being offset – see CFM90680.

A financial services group does not need to apply both the gateway test and the financial services group test - if it passes financial services group test either of these tests, Part 7 will not apply to it and it need not consider the gateway.

TIOPA10/S261(1) applies for a period of account of the worldwide group. This means that the gateway test is applied for each new period of account, which in most cases means the test is applied each year. It is possible that a group may pass through the gateway in one year, but fail to do so in the next.

When calculating the UK net debt of the group the gateway test includes the net debt of group securitisation companies. A group securitisation company is defined at TIOPA10/S273A as a company that is subject to the special tax rules for securitisation companies and its results are disclosed in the financial statements of the worldwide group.

While the main rules within Part 7 compare finance expenses (broadly interest, payments akin to interest and other costs of borrowing), the gateway test compares debt. However, as with the main rules, the gateway test works on a net versus gross comparison. The net debt of each relevant group company and group securitisation company (in other words, relevant liabilities net of relevant assets) is aggregated and that figure is compared with the gross debt of the consolidated group.

The gateway test is based on the consolidated financial statements of the group and the financial statements of the relevant group companies and group securitisation companies. Groups, with the odd exception, do not have to apply legislation or case law to arrive at a tax-adjusted figure of debt.

The gateway test has its own set of anti-avoidance rules within Part 7 which prevent groups from manipulating the rules so that they pass the test, when they would clearly be caught by the main rules.