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HMRC internal manual

Corporate Finance Manual

HM Revenue & Customs
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Debt cap: financial services groups: introduction

Outline of the exclusion for qualifying financial services groups

Some businesses use debt as an integral part of their business; without borrowing money the business would not be able to function or its operations would be severely curtailed. An obvious example is the banking industry; a significant part of the business involves borrowing money which is then lent on at a margin. The debt cap measure is not intended to disallow finance expenses for these type of businesses. Chapter 2 of Part 7 of TIOPA 2010 contains rules that provide for financial services groups to be excluded from the debt cap if they meet certain conditions.

The conditions are tested for each period of account of the worldwide group. If the conditions are met in one period it does not confer an automatic exclusion for the group for subsequent periods of account. If the group meets the conditions it is a qualifying financial services group, then the period of account of the worldwide group is not subject to the rest of Part 7 (see TIOPA10/S261 (2)). If the group is a qualifying financial services group then every company in that group is excluded from the debt cap provisions.

The term ‘financial services’ covers a very broad spectrum of businesses. Not all business activities undertaken by the financial services industry are reliant on borrowing in order to conduct business. It is for this reason that the financial services exclusion is restricted to groups that derive their income from one of the following qualifying activities

  • Lending
  • Insurance
  • Dealing in financial instruments

The exclusion can be tested either by reference to a worldwide group as a whole or just the relevant group companies of a worldwide group. Financial services groups generally undertake a broad range of activities and while a large number of such groups will generate almost all their income from the above activities it is very unlikely that a group would derive 100% of their income from these activities. The exclusion therefore applies where substantially all the income is derived from these three qualifying activities, with some flexibility for ancillary activities that only take place because of the existence of a qualifying activity.

Some financial services groups, particularly those involved in lending activity, are likely to pass the gateway test and so won’t need to consider whether they meet the financial services exclusion. The exclusion does not deal with groups which are a mix of financial and non-financial services business, but in the small number of cases in this type of scenario the groups are likely to pass the gateway test.