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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: DRICs: example

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

Example - default allocation where a group includes DRICs

A group has 7 relevant group companies which, in a particular period of account of the worldwide group, have net financing deductions. Two of these companies are dual resident investing companies (DRICs). The net financing deductions are as follows:

Companies that are not DRICs NFD (£ million) Companies that are DRICs NFD (£ million)
Alpha Ltd 82 Psi Ltd 100
Beta Ltd 3 Omega Ltd 12
Gamma Ltd 21    
Delta Ltd 19    
Epsilon Ltd 35    
Total non-DRICs 160    
    Total DRICs 112

The tested expense amount (TEA), which is the aggregate of the net financing deductions across all relevant group companies, is therefore £272 million. The amount referred to as X in S284A, the aggregate net financing deduction for the DRICs, is £112 million.

The group does not submit a statement of allocated disallowances, and a “default allocation” is made.

The following table shows how a disallowance would be allocated under S284 and S284A in two scenarios:

  • if the total disallowed amount (TDA) is £60 million, and
  • if the total disallowed amount is £180 million.

For a company that is not a DRIC, S284A (2) provides that the disallowance is calculated by applying the formula NFD/(TEA - X) x TDA.

Thus in the first scenario, the disallowance for each non-DRIC company will be:

NFD x 60/ (272 - 112), or NFD x 60/160

For a DRIC, S284A (3) provides the disallowance is NFD/X x (TDA - (TEA - X))

Inserting the figures for the first scenario (where the total disallowed amount is £60m) into this formula gives:

NFD/112 x (60 - (272 - 112))

Since this will always be negative, however, the disallowance for each DRIC is taken as nil.

In the second scenario, the disallowance for each non-DRIC would, under the S284A (2) formula, be:

NFD x 180/ (272 - 112)

This amount would, however, always be more than the company’s net financing deduction, so S284A (2) provides that the disallowance is limited to the company’s NFD.

The amount to be allocated to each DRIC under S284A (3) will be:

NFD x (180 - (272 - 112)/112, or NFD x 20/112

The overall result, in each scenario, will therefore be allocation of the full amount of the disallowance:

Company NFD (£ million) Disallowed amount if TDA = £60 million (£ million) Disallowed amount if TDA = £180 million (£ million)
Alpha 82 (82 x 60/160) 30.75 82
Beta 3 1.125 3
Gamma 21 7.875 21
Delta 19 7.125 19
Epsilon 35 13.125 35
Psi 100 Nil (100 x 20/112) = 17.857
Omega 12 Nil 2.143
Totals 272 60 180