Debt cap: stranded reliefs: NTLR deficits - example
Example of section 322 election
A worldwide group consists of three companies, B Ltd (the ultimate parent of the group, UK resident), A Ltd (100% subsidiary of B, also UK resident), and C (100% subsidiary of A, resident in Belgium). All three companies prepare accounts to 31 December.
The position of the two UK companies in year ended 31 December 2011 is as follows:
B Ltd has borrowed from an external bank. In year ended 31 December 2011, interest of £1.2 million is payable on the external debt.
It on-lends the amount it has borrowed to A Ltd, taking a small turn. It receives interest of £1.25 million from A Ltd in the period.
B Ltd also owns the group’s trading premises, which it leases to A Ltd. It receives rental income of £0.5 million in the period. In addition, it receives interest of £0.6 million in the period on a portfolio of government and corporate bonds. It has no other income.
B Ltd also has a non-trading loan relationship deficit of £1 million brought forward from year ended 31 December 2010.
A Ltd pays interest of £1.25 million to B Ltd in year ended 31 December 2011. It also pays interest of £300,000 on a loan from the non-resident company, C.
Corporation tax position of A Ltd and B Ltd before debt cap applies
Ignoring debt cap the tax position of companies A and B will be as follows.
Company A has paid interest to Companies B and C and will have a loan relationship debit of £1.55m.
Company B has received interest of £1.85m and rent from Company A of £0.5m. It has paid interest of £1.2m and its CT computation will be:
|Loan relationship profits (credits £1.85m less debits £1.2m)||650,000|
|Less NTLR deficit brought forward||1,000,000|
|Profits chargeable to CT||150,000|
|NTLR deficit carried forward||Nil|
Debt cap position without a section 322 election
The bank loan to B Ltd is the group’s only external borrowing. The available amount is therefore £1.2 million.
A Ltd has financing expense amounts of £1.25 million (on its loan to B) and £0.3 million (on its loan to C). It therefore has a net financing deduction of £1.55 million.
B Ltd has financing expense amounts of £1.2 million and financing income amounts of £1.85 million. It therefore has net financing income of £0.65 million.
The group thus has a tested expense amount of £1.55 million. Its total disallowed amount will be £0.35 million (£1.55 million less £1.2 million). This disallowance is allocated to A Ltd, reducing A Ltd’s loan relationship debits from £1.55 million to £1.2 million.
The group has a tested income amount of £0.65 million. It can therefore disregard £0.35 million of the financing income in B Ltd (this being the lower of the disallowed amount and the tested income amount).
B Ltd’s loan relationship profits are therefore reduced from £0.65 million to £0.3 million, and its CT computation will be:
|Loan relationships profits (credits £1.85m less debits £1.2m)||650,000|
|Disregard of financing income under Chapter 4 Part 7||(350,000)|
|Less NTLR deficit brought forward||(800,000)|
|Profits chargeable to CT||Nil|
|NTLR deficit carried forward||200,000|
Companies A and B make a joint election under section 322
A Ltd and B Ltd elect to disregard £350,000 of A Ltd’s financing expense amounts. This ‘relevant amount’ satisfies the condition in section 322 (7) since it is smaller than the non-trading deficit brought forward from previous accounting periods and set off by B Ltd against non-trading profits in its 2011 accounting period.
It follows that, under section 323, an equivalent £350,000 of B Ltd’s financing income amounts are disregarded. The debt cap calculations given above must be re-worked.
A Ltd’s net financing deduction is reduced from £1.55 million to £1.2 million.
B Ltd, which previously had financing income amounts of £1.85 million is now treated as having financing income amounts of only £1.5 million. It still has financing expense amounts of £1.2 million. It therefore has net financing income of £300,000.
It remains the case that A Ltd is the only company with a net financing deduction, so the tested expense amount is £1.2 million. This is the same as the available amount, so there is no disallowed amount.
As a result, there is no disregard of financing income in B Ltd under TIOPA10/PT7/CH4. B’s CT computation will be:
|Loan relationships profits||650,000|
|Profits chargeable to CT||150,000|
The overall effect of the election is therefore to enable B Ltd to use the whole of its brought-forward deficit. A Ltd’s CT profits are reduced by £350,000 because there is no longer a disallowance under Chapter 3 of Part 7, while B Ltd’s profits are increased by only £150,000. The position of B Ltd before the debt cap is restored.