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HMRC internal manual

Corporate Finance Manual

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HM Revenue & Customs
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Debt cap: financial services groups: trading income of a worldwide group

What income is included in the worldwide trading income of a worldwide group

A group is a qualifying financial services group for a period of account if it meets the trading income condition for that period. The group meets the trading income condition if substantially all of its worldwide trading income is derived from qualifying activities.

TIOPA10/S266 (3) says that the worldwide trading income means the trading income of the worldwide income, which in turn is defined by section 272.

The trading income of the worldwide group is the aggregate of the:

  • Gross income of the group as disclosed in the consolidated financial statements;
  • Income that is the disclosed in the consolidated financial statements on a net basis (or would be reported on a net basis if the statements were prepared in accordance with IAS).

In other words, it is the income disclosed in the income statement of the consolidated financial statements except for income that is reported on a net basis, where the net figure is taken. Section 272 (3) (b) makes it clear that the income taken into account is the income before any deductions. The only exception is income reported on a net basis where the margin on buying and selling is reported. CFM90840 explains in more detail the reason why the calculation of trading income takes income reported on a net basis.

An example of part of an income statement from the consolidated financial statement of a fictitious financial services group is included at CFM90960 and demonstrates what income is taken into account in calculating the worldwide trading income.

The income taken into account (gross or net) is the income arising from the normal activities of the worldwide group. Where for example a worldwide group disposes of a part of its business or a significant investment, the proceeds are not included in the calculation of the worldwide trading income.

The worldwide trading income should be capable of being identified just from the consolidated income statement. No adjustments to the income statement are required. If the income is not included in the income statement then it is not part of the worldwide trading income for that period of account.

Investment contract premiums

Some investment contract premiums are accounted for directly in the balance sheet (or equivalent) of the insurance company, as an increase in liabilities. Such premiums should be included as qualifying income for the purposes of the financial services exclusion.

Acceptable financial statements

Section 272 (6) requires financial statements used for the basis of calculation of the worldwide trading income to be acceptable financial statements (as defined by section 347 (3)). If the financial statements are not acceptable, then the calculation of the worldwide trading income must be made using income that would be reported in consolidated financial statements prepared in accordance with IAS. Similarly if no consolidated financial statements are prepared for the worldwide group then the worldwide trading income is calculated as though consolidated financial statements had been prepared under IAS.

In practice groups engaged in financial services will prepare their financial statements in accordance with IFRS and so it very likely that groups looking to see whether they are qualifying financial services groups for a period of account will have acceptable financial statements.