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HMRC internal manual

Corporate Finance Manual

Debt cap: failure to make statements of allocation: default allocation of disallowance of financing expense amounts: no DRICs

This guidance applies to worldwide group periods of account ending before or straddling 1 April 2017.

Calculating the default reduction: no Dual Resident Investing Companies

In the absence of a statement of allocation each relevant group company that has a net financing deduction for the relevant period of account must reduce the financing expense amount it brings into account by using the formula given by TIOPA10/PT7/S284:

NFD/TEA x TDA, where

  • NFD is the net financing deduction of the company for the relevant period of account.
  • TEA is the tested expense amount for the relevant period of account
  • TDA is the total disallowed amount
  • An example of a calculation using this formula is below.

The Regulations identify the specific order in which the financing expense amounts are to be reduced.

There is a special rule where the UK group includes one or more ‘dual resident investing companies’ - ‘DRICs’. See CFM91825.

Example of a default allocation - no DRICs

Multinational group R has four subsidiaries in the UK, companies S, T, U and V. None are dual resident investing companies. For the relevant period of account of the worldwide group:

  • Company S has a net financing deduction of £850,000
  • Company T has a net financing deduction of £1,300,000
  • Company U does not have a net financing deduction at all but has financing income of £950,000
  • Company V also has financing income of £800,000.

The tested expense amount, which is the total of the net financing deductions, is £2,150,000. The available amount from the accounts of the worldwide group is £1,500,000. The total disallowed amount is therefore £650,000.

Applying the formula NFD/TEA x TDA

For Company S the default disallowance is 850,000/2,150,000 x 650,000 = £256,977.

For Company T the default disallowance is 1,300,000/2,150,000 x 650,000 = £393,023

The total of the default disallowances (£256,977 + £393,023) equals the total disallowed amount of £650,000.

Companies S and T should reduce their financing expense amounts by the amount of their default reductions.