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.