CFM90680 - Debt cap: gateway test: UK net debt derived from financial statements of group companies
This guidance applies to worldwide group periods of account ending before or straddling 1 April 2017.
The gateway test comparator for the UK part of a group is drawn from the financial statements of the group’s relevant group companies {#}
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 for a particular company is negative, after averaging the figures at the beginning and end of a period of account, it is deemed to be nil (see CFM90690). This can result in the UK net debt being significantly larger than might be expected if the assets and liabilities of all of the companies were totalled separately before being offset.
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.
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). Guidance on the new rules is available online at:
https://www.gov.uk/government/publications/corporate-interest-restriction-draft-guidance
Where the group draws up accounts for a period that straddles 1 April 2017, it is treated for the purposes of the existing debt cap as if it had drawn up accounts for a period ending on 31 March 2017. Accordingly, where a company’s accounting period overlaps 1 April 2017, 31 March 2017 is substituted for the actual end date of the accounting period - F(No.2)A17/SCH5/PARA26(2).