Debt cap: failure to make statements of allocation: outline
This guidance applies to worldwide group periods of account ending before or straddling 1 April 2017.
What happens when a group fails to make statements of allocation
If the reporting body fails to make a statement of allocation of disallowances or exemptions, TIOPA10/PT7/S284 and 296 apply. These paragraphs along with the Corporation Tax (Financing Costs and Income) Regulations 2009 (SI 2009/3173) operate to allocate the disallowances or exemptions between the relevant group companies or UK group companies.
Part 7 contains provision on how the amount allocated by default is calculated for each company, and the regulations specify the order in which the reduction is to be made.
Where no statement of allocation has been made, it is up to each member of the UK group to show the appropriate disallowance of financing expenses, or disregard of financing income, in its CTSA return. The Corporation Tax (Financing Costs and Income) Regulations 2009 contain provisions requiring the ultimate UK parent company in a group to make the necessary information available to individual companies to allow them to comply (CFM91890).
The submission of statements of allocated disallowances and exemptions, either by authorised companies or by group companies acting jointly, is mandatory - ‘default allocation’ is a last resort to enable individual companies to comply with their obligations to make correct CTSA returns. It is not an alternative to submission of a statement.
Where HMRC has reason to believe that the debt cap rules should apply, or are likely to apply, to a group, but no allocation statements are submitted for a particular period of account, and the returns of group companies do not show any default allocation, the initial approach of HMRC staff should be to request an explanation.
If there is a dispute about whether or not there is an overall disallowance (for example in a case where it appears that the tax avoidance provisions in Chapter 6 of Part 7 may apply), and the dispute is resolved in HMRC’s favour, the group should be invited to submit statements allocating the agreed disallowance, and any disregard of financing income. Where the group had previously, in good faith, formed a view that the debt cap rules did not apply, this should be regarded as coming within the circumstances where late statements of allocation may be accepted (CFM91680). HMRC staff should not insist on a default allocation being made.
Although the regulations give HMRC the power to make determinations of the tested expense amount, total disallowed amount, the total of the unrestricted reductions and the tested income amount (CFM91910), it is likely that the formal procedure will only rarely to be invoked.