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HMRC internal manual

Corporate Finance Manual

Debt cap: stranded reliefs: non-trading loan relationship deficits

Election to disregard financing expenses where company has non-trading loan relationship deficit

CFM92210 describes the situation where one group company (‘company A’) pays interest to another (‘company B’), and company B has a non-trading loan relationships deficit carried forward. TIOPA10/S322 allows A and B - the two parties to the financing arrangement in question - to make a joint election. The effect of the election is that a financing expense amount of company A (called ‘the relevant amount’ in the legislation) is no longer treated as a financing expense amount. Nor is it a financing income amount of company B (TIOPA2010/S323).

The provision applies only to financing expense amounts that consist of loan relationship debits, not to financing costs implicit in finance leases or to debt factoring expenditure.

Four conditions must be met before an election can be made.

  • Company A and company B must both be members of the worldwide group.
  • The recipient company, company B, must either be UK resident or be a non-resident company carrying on a trade through a UK permanent establishment. Although it is not explicitly stated Company A will also be a UK resident or a non-resident company carrying on a trade through a UK permanent establishment. This is because the relevant amount has to be financing expenses that are loan relationship debits that would be brought into account for UK corporation tax.
  • Company B must have brought forward from a previous accounting period an amount of non-trading deficit that is set off against non-trading profits of an accounting period that falls wholly or partly within the period of account of the worldwide group. The non-trading profits will include interest receivable from company A, but are not confined to such income - for example, they may include other loan relationships or derivative contracts profits, chargeable gains or property income.
  • The non-trading deficit that is set off in this way must be equal to, or greater than, the ‘relevant amount’.

Suppose, for example, interest of £1 million is payable by company A to company B in year ended 31 December 2012, and company B has no other non-trading profits of the accounting period. Company B has a non-trading deficit of £0.5 million brought forward at 1 January 2012.

The maximum amount of non-trading deficit that could be set against non-trading profits in company B is £0.5 million, which is less than the ‘relevant amount’ of £1 million. Companies A and B therefore cannot elect under section 322 for the entire £1 million to be disregarded. An election does not have to relate to the whole of the financing expense amounts of a company, however. The two companies can make a valid election specifying financing expense amounts of company A totalling £0.5 million (or less) as the ‘relevant amount’.

An election under section 322 must be made within three years of the end of the period of account of the worldwide group to which the relevant amount relates.

There is an example illustrating a section 322 election at CFM92230.