CFM90718 - Debt cap: gateway test: definition of relevant liabilities - finance leases and ‘quasi loans’

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

Relevant liabilities for the purposes of calculating the worldwide gross debt and UK net debt amount

Finance leases

A finance lease is in effect a secured loan and so liabilities in respect of finance leases are treated as relevant liabilities (see TIOPA10/S263(3)(b) and S264(2)(b)). Accounting standards explicitly define a finance lease. A liability in respect of a finance lease is a qualifying liability only if it relates to an arrangement that falls within the applicable accounting definition of a finance lease.

Quasi loans

Relevant liabilities also include arrangements that are not short term or long term borrowing or finance leases but are:

  • Financial liabilities; that
  • Produce a return that is economically equivalent to interest; and
  • Are not short term.

This allows arrangements that have the same economic effect as loans, but are not legally loans, to be taken into account as relevant liabilities.

TIOPA10/S263(6) defines a return as economically equivalent to interest if it is reasonable to assume that it is calculated by the time value of money, is at a rate that is reasonably comparable (but not necessarily identical to) to the interest rate in comparable circumstances and it is practically unlikely that it will not be paid unless the person by whom it falls to be produced is prevented (by insolvency or otherwise) from producing it. In practise it should be accepted that where a contract under which a return economically equivalent to interest is paid contains non-performance or default terms this will not prevent the liability being a relevant liability under TIOPA10/S263(6).

TIOPA10/S263(6)(c) requires there to be no practical likelihood that the return will ceased to be produced, other than as a result of insolvency etc. This is tested ‘at the relevant time’, that is to say, when the arrangement is entered into.