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HMRC internal manual

Corporate Finance Manual

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HM Revenue & Customs
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Debt cap: gateway test: application of the gateway test: examples

Example 1: successive periods of account

The worldwide gross debt and UK net debt for a group for the three years ended 31 December 2014 are as follows:

Accounting Period Worldwide gross debt UK net debt Gateway test %
       
Y/E 31/12/2012 £500m £400m 80%
Y/E 31/12/2013 £600m £440m 73.3%
Y/E 31/12/2014 £700m £600m 85.7%

The group fails the gateway test in the first period and so has to apply the rest of TIOPA10/Part 7. It passes the gateway test in the second period and no further action is required by the group. The group fails the gateway test in the third period and so applies the rest of TIOPA10/Part 7.

Example 2: calculating the UK net debt of a group

A worldwide group has three subsidiaries in the UK, all of which are relevant group companies. The group and its subsidiaries all prepare their financial statements each year to 31 December. The balance sheets of the relevant group companies show the following relevant assets and liabilities:

  Y/E 31 December 2012 Y/E 31 December 2013        
             
  Relevant liabilities Relevant assets Start date Net debt Relevant liabilities Relevant assets End date Net debt
Company A £100m (£20m) £80m £120m (£20m) £100m
Company B £10m (£40m) (£30m) £15m (£35m) (£20m)
Company C nil (£30m) (£30m) £200m (£40m) £160m

The period of account of the worldwide group is the year ended 31 December 2013. The end date for each of the relevant group companies is 31 December 2013 and the start date is 1 January 2013. However for the purpose of calculating the net debt for the start date, each relevant group company can take its relevant assets and relevant liabilities from the balance sheets for the previous year.

Company A has a net debt amount of £90m, which is the average of the company’s net debt as that the start date and end date. Company B has a calculated net debt amount of (£25m) as this is a positive figure the net debt amount is deemed to be nil. Company C has a net debt amount of £65m - although it has negative net debt at the start date, the average net debt is higher than the de minimis of £3m.

Overall therefore the UK net debt for the group for the period of account ended 31 December 2013 is £155m (£90m+nil+£65m).

Example 3: relevant group companies with different accounting periods

The worldwide group prepares its consolidated financial statements each year to 31 December. The worldwide group has relevant liabilities of £150m at 31 December 2011 and £250m at 31 December 2012. During the year ended 31 December 2012 the group has seven relevant group companies.

  • Company A prepares financial statements each year to 31 December. The balance sheet for the year ended 31 December 2011 includes net debt of £50m and the balance sheet for the year ended 31 December 2012 includes net debt of £70m.
  • Company B prepares financial statements each year to 31 December. It has net debt of £4m at 31 December 2011 and net debt of £1.5m at 31 December 2012.
  • Company C is established on 1 March 2012 but doesn’t start trading until 1 May 2012. The first financial statements are prepared to 31 December 2012. The company has relevant assets of £5m at 1 May 2012 but no relevant liabilities; and so has net debt of (£5m) at that date. The balance sheet for the period ended 31 December 2012 shows net debt of £25m.
  • Company D prepares financial statements each year to 30 November. The company determines its net debt as £40m as at 1 January 2012 (the start date for this company) and £50m as at 31 December 2012 (the end date for this company).
  • Company E prepares financial statements each year to 31 December 2012. The company is sold to a third party on 30 June 2012. The balance sheet for the year ended 31 December 2011 includes net debt of £20m and the company determines that its net debt as at 30 June 2012 was £30m.
  • Company F prepares financial statements each year to 31 December. The balance sheet for the year ended 31 December 2011 includes relevant assets of £50m and the balance sheet for the year ended 31 December 2012 includes relevant assets of £70m. The company has no relevant liabilities at either date.
  • Company G prepares financial statements each year to 31 December. It is a dormant company; it shows an intra-group loan note of £120m as a liability on its balance sheet as at 31 December 2011 and 2012 but no interest is charged on this note.
  Start date Net debt End date Net debt Net debt amount
           
Company A 1/1/12 £50m 31/12/12 £70m £60m
Company B 1/1/12 £4m 31/12/12 £1.5m Nil
Company C 1/5/12 (£5m) 31/12/12 £25m £10m
Company D 1/1/12 £40m 31/12/12 £50m £45m
Company E 1/1/12 £20m 30/6/12 £30m £25m
Company F 1/1/12 (£50m) 31/12/12 (£70m) (£60m)
Company G 1/1/12 £120m 31/12/12 £120m Nil
UK net debt         £80m

The period of account of the worldwide group is the year ended 31 December 2012. This sets the start and end dates for the relevant group companies in relation to calculating their net debt amounts unless any company becomes or ceases to be a relevant group company at some time during that period.

Company A and D both have the same period of account as the group and so their net debt amounts are calculated by reference to amounts disclosed on their balance sheets for 31 December 2011 and 2012. While Company B has a calculated net debt amount of £2.75m, the net debt amount is deemed to be nil because it is under the de minimis limit of £3m. Companies C and E are only relevant group companies for part of the period ended 31 December 2012. Company C becomes a relevant group company on 1 May 2012 and so this is its start date; company E ceases to be a relevant group company on 30 June 2012 and so this is its end date. Company F has a negative net debt amount and so the net debt is deemed to be nil. Company G has a calculated net debt amount of £120m but as the company is dormant through the year ended 31 December 2012 its net debt amount is deemed to be nil.

The group has UK net debt of £140m. The worldwide gross debt is £200m. The UK net debt is 70% of the worldwide gross debt and so TIOPA10/PART7 does not apply to the group for year ended 31 December 2012.