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HMRC internal manual

Corporate Finance Manual

Debt cap: intra-group short-term debt: excluding finance expenses

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

Elections to exclude short-term finance

The exclusion of short-term finance operates by election. TIOPA10/S319 explains the conditions that must be met in order for an election to be made. If the conditions are met, and an election made, the amount or amounts specified in the election - which would otherwise be financing expense amounts of the company - are treated as though they are not financing expense amounts.

This means that the amount in question is not included in the calculation of a relevant group company’s calculation of its net financing deduction, or as the case may be, a UK group company’s net financing income. It also means that a disallowance cannot be allocated against such an amount under Chapter 3 of Part 7.

The two conditions are:

  1. TIOPA10/S319 (4) - the company paying the relevant expense and the company receiving that amount are both members of the worldwide group. This means that the exclusion only applies to intra-group finance arrangements. Because a financing expense amount can be taken into account by a relevant group company in calculating its net financing deduction (see CFM91030), or a UK group company calculating its net financing income (see CFM91230), the exclusion can apply so long as the company is a member of the group (rather than the more restrictive relevant group company).
  2. TIOPA10/S319 (5) - the finance arrangement must be a short-term loan relationship in relation to the period of account of the worldwide group. The exclusion considers whether a finance arrangement is short-term during the period of account of the worldwide group, not the accounting period of the particular UK company.

The conditions for an election are provided by TIOPA10/S319 (6). The exclusion can only apply if the paying and receiving group companies make a joint election. The election can be made at any time up to 36 months after the end of the period of account of the worldwide group to which the amount of expense relates. So if the expense is payable during the period of account of the worldwide group ended 31 December 2012, an election can be made at any time up to 31 December 2015.

TIOPA10/S319 (7) states that once made, an election is irrevocable. It relates, however, only to the specified financing expense amounts in the specified period of account of the worldwide group. If the short-term debt remains in place into the next period of account, the companies are free to make, or not make, a further election for the next period.

An election can be made in respect of an expense amount that would otherwise be a financing expense amount whether the group company receiving the amount is resident in the UK or overseas. The requirement for the election to be made jointly by the paying and receiving company applies, however, whether or not the receiving company is UK resident.

An election applies only to the particular financing expense amount, or amounts, specified in the election. A company which has a number of discrete short-term borrowings, whether from the same group company or from different group companies, may make section 319 elections for financing expense amounts relating to some of these borrowings but not others.

In practice, where a company wishes to elect in respect of several short-term borrowings, there is no objection to the elections being combined in one letter (or made on an annual basis as part of the company’s CT computations), provided it is clear that each receiving company concerned has consented to the election.