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HMRC internal manual

Corporate Finance Manual

From
HM Revenue & Customs
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Debt cap: gateway test: calculation of UK net debt

How to calculate the UK measure of debt for the gateway test

The gateway test involves a comparison of the UK net debt of a group with the gross debt of the consolidated group.

  • The UK net debt is the sum of the net debt amounts of all the relevant group companies and group securitisation companies for a period of account of the worldwide group (TIOPA10/S262(1)).
  • The net debt amount of a relevant group company or group securitisation company is the average of the net debt of the company at its start date and the net debt at its end date (TIOPA10/S262(2)).
  • The net debt of a relevant group company or group securitisation company is the sum of its relevant liabilities (see CFM90710) less the sum of its relevant assets (see CFM90720) at any particular date (TIOPA10/S263(1)).

The calculation of the UK net debt amount therefore requires an examination of all the relevant group and group securitisation companies for a period of account of that group, even if a company is only a group company for part of that period.

The calculation of the net debt for any company at a particular date may result in the relevant assets exceeding the relevant liabilities, resulting in a negative amount of net debt. TIOPA10/S263(2) explicitly allows for such a negative amount. If for example the net debt at the start date is minus £5 million (that is to say, assets exceed liabilities by £5 million), and the net debt at the end date is positive £15 million, then the average of the two amounts, the net debt amount, is £5 million. Where the net debt amount is negative, it is deemed to be nil (see CFM90690).

Where the relevant group company or group securitisation company is dormant from its start date to its end date for any period of account of the worldwide group, then its net debt amount is deemed to be nil irrespective of any amounts of debt actually owed by the company (see TIOPA10/S262(4). This is because dormant companies will not charge interest on that debt. However, a company that is dormant for only part of the period of account is not excluded in this way. Dormant company is defined in TIOPA10/S353.