Beta This part of GOV.UK is being rebuilt – find out what this means

HMRC internal manual

Corporate Finance Manual

From
HM Revenue & Customs
Updated
, see all updates

Debt cap: financial services groups: trading income of UK group companies

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

CFM90940 explains how the worldwide trading income of a worldwide group is calculated. However a worldwide group can test whether it is a qualifying financial services group for a period of account of the worldwide group by testing the trading income condition of just the relevant group companies and group securitisation companies for that period of account. The trading income condition can also be met where substantially all of the UK trading income for a period of account of the worldwide group is derived from qualifying activities.

TIOPA10/S266 (3) says that the UK trading income for a period of account of the worldwide group means the sum of the trading income of each company that was a relevant group company or group securitisation company at any time during that period. The trading income of a relevant group company or group securitisation company is in turn is defined by section 271.

The test by reference to the relevant group and group securitisation companies is similar to the test based on the worldwide trading income. In that test, the trading income is taken from the consolidated income statement of the worldwide group. In the test based on just the relevant group and group securitisation companies, sections 266 (3) and 271 effectively construct a mini-consolidated group consisting of just the relevant companies - the trading income is the income of that mini consolidated group.

The trading income of a relevant group company is the aggregate of the

  • Gross income of the group as disclosed in the financial statements of the company
  • Income that is the disclosed in the financial statements of the company on a net basis (or would be reported on a net basis if the statements were prepared in accordance with generally accepted accounting practice)

In other words, as with the calculation of the worldwide trading, the trading income of a relevant group company is the income disclosed in the income statement of that company except for income that is reported on a net basis, where the net figure is taken. Section 271 (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.

In order to ensure that the UK trading income only takes account of income of the mini-consolidated group of relevant group companies, section 271 (7) requires income (either gross or net) from another UK group company, relevant group company or group securitisation company to be excluded. UK trading income does not include dividends received by a relevant group company in its capacity as the holding company of the group.

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.

Example of calculation of UK trading income

CFM90850 provides guidance on which income of relevant group or group securitisation companies to take into account when the accounting period of the relevant group or group securitisation company does not match the accounting period of the worldwide group, or the company begins or ceases to be a relevant group or group securitisation company part way through a period of account of the worldwide group.

A worldwide group has four subsidiaries in the UK. Three are 100% subsidiaries and are relevant group companies. The fourth is a joint venture with an unconnected retail group; the worldwide group has a 60% interest in the joint venture and so it is a UK group company for the purposes of the debt cap.

  Trading income Intra-group trading income
     
Relevant group company A    
Income from lending activity (from B) £50m £50m
Income from lending activity (from C) £20m £20m
Income from lending activity (from D) £20m £20m
Income from lending activity (non-UK) £10m £10m
Relevant group company B    
Income from lending activity £200m  
Income from fees £10m  
Relevant group company C    
Income from dealing in financial instruments £30m  
UK Group company D (joint venture)    
Income from lending activity £80m  
Income from fees £20m  

The trading income for each relevant group company is as follows

  • Company A - £10m (only the intra-group income from outside of the UK is taken into account)
  • Company B - £210m (all the income is from third parties)
  • Company C - £30m (all the income is from third parties)
  • Company D - nil (because the company is not a relevant group company)

The UK trading income is £250m: the sum of the trading income of each of the relevant group companies.