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HMRC internal manual

Corporate Finance Manual

Debt cap: stranded reliefs: introduction

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

The problem of stranded deficits

Where a group has a debt cap disallowance, the burden of taxation will be shifted between companies in the UK group, even if the disallowance is fully ‘covered’ by a disregard of financing income. As a result, it may become much more difficult for groups to use non-trading loan relationships deficits that are being carried forward. Such deficits can only be used against non-trading profits of the same company (see CFM32040).

For example, suppose a particular company in a group (‘company B’) has a non-trading loan relationships deficit brought forward. Without the debt cap, company B might lend money to another group company (‘company A’) at a commercial rate of interest. Company B has interest income, against which the loan relationships deficit may be set, while company A has loan relationships debits that can be offset against its profits of the accounting period. Planning of this sort, designed to utilise reliefs in the most efficient way, is widespread and has never been regarded as particularly offensive by HMRC.

If the group has a debt cap disallowance, however, the effect may be to disallow all or part of the interest payable by company A, increasing the CT payable by that company. Since company B has net financing income - its financing income amounts under TIOPA10/S314 are computed before any allowance of a non-trading loan relationship deficit brought forward - it is likely that part or all of this amount will be disregarded under Chapter 4. (While some groups may have a number of companies with net financing income and will be able to allocate the whole of the exemption to companies without brought-forward deficits, this is likely to be the exception rather than the rule).

As a result, company B’s non-trading profits for the accounting period are reduced, perhaps to nil, with a consequent reduction in the amount of the deficit it is able to utilise. Without some special provision, deficits might become stranded in particular companies almost indefinitely.

TIOPA10/PT7 therefore contains special provisions to cater for this scenario. These are explained at CFM92220