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HMRC internal manual

Corporate Finance Manual

Debt cap: stranded reliefs: management expenses

Companies with deductions for management expenses

The problem of stranded reliefs may also arise where a company with investment business (‘company B’) has management expenses. Management expenses must be deducted in computing the total profits of the company and, while surplus management expenses of the period may be surrendered as group relief, those expenses which cannot be used in the accounting period must be carried forward and treated as management expenses of the next period (see CTM8580). Thus if financing income amounts of the company are disregarded under TIOPA10/PT 7/CH4, the opportunities for using management expenses are correspondingly reduced.

TIOPA10/S324 therefore provides for an election, similar to that available to companies with non-trading deficits (CFM92220). It applies where two companies, A and B, are parties to a financing arrangement, and five conditions are met. Where A and B make a joint election, within three years of the end of the relevant period of account of the worldwide group, an amount (‘the relevant amount’) that would otherwise be a financing expense amount of company A is not so treated. Section 325 correspondingly provides that the relevant amount is not a financing income amount of company B.

As with section 322 elections, it applies only to financing expense amounts meeting condition A of section 313 - in other words, those consisting of loan relationships debits.

The conditions that must be met are as follows.

  • Companies A and B must both be members of the worldwide group.
  • Company B must be a company with investment business (see CTM8040), that is either resident in the UK or is a non-resident company carrying on a trade through a UK permanent establishment.
  • Company B must be allowed a deduction for management expenses under CTA09/S1219 for an accounting period falling wholly or partly within the relevant period of account of the worldwide group.
  • The amount of the deduction allowed must be greater than or equal to the relevant amount.
  • The inclusion of the relevant amount of financing income, corresponding to company A’s financing expense amount, in company B’s total profits for CT purposes must make the difference between company B having a profit and having a loss. There is an example at CFM92250.

The election must be made by A and B jointly, within three years of the end of the period of account of the worldwide group to which it relates.