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HMRC internal manual

Corporate Finance Manual

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HM Revenue & Customs
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Debt cap: calculating the disallowance of financing expense amounts: the tested expense amount

What is the tested expense amount?

The tested expense amount is built up in a number of stages.

First, it is necessary to identify all of the relevant group companies - see CFM91060 for the definition of a relevant group company.

Second, the financing expense amounts and financing income amounts must be determined. Guidance on establishing the company’s financing expense amounts is at CFM91030. For further information on establishing the company’s financing income amounts see CFM91230.

This enables you to determine the company’s net financing deduction, which is defined in TIOPA10/S329. It is simply the sum of the relevant group company’s financing expense amounts for the period less the sum of the company’s financing income amounts for the period.

Where, for a company, the difference between these two sums is negative (i.e. the company’s financing income exceeds its financing expenses), the net financing deduction of the company for the period is nil. Similarly where the difference is small the net financing deduction of the company for the period is nil.

To establish whether or not the difference is small, see CFM91080.

The final step is to aggregate the net financing deductions of all relevant group companies - this is the tested expense amount for the period (TIOPA10/S329(1)).

Example

A group has three relevant group companies, A Ltd, B Ltd and C Ltd. The worldwide group prepares accounts for year ended 31 December 2011, and all three UK companies make up their accounts to the same date.

In year ended 31 December 2011:

  • A Ltd has financing expense amounts totalling £10.5 million, and financing income amounts of £2 million.
  • B Ltd has financing expense amounts of £0.75 million, and financing income amounts of £4 million.
  • C Ltd has financing expense amounts totalling £22 million, and no financing income.

A Ltd will therefore have a net financing deduction of £8.5 million. B Ltd has more financing income than financing expenses, and therefore has a net financing deduction of nil. C Ltd has a net financing deduction of £22 million. The tested expense amount is therefore £8.5 million plus £22 million, or £30.5 million.