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HMRC internal manual

Corporate Finance Manual

HM Revenue & Customs
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Debt cap: stranded reliefs: management expenses - example

Example of section 324 election

Company A and company B are both UK resident companies and are the only members of the worldwide group. Both companies prepare accounts to 31 December.

A Ltd has been set up to undertake a large construction contract, which is expected to take four years. It is 100% owned by B Ltd, which is a joint venture company in which two major groups each own 50% of the shares (so that A and B form a separate group, with B Ltd as the ultimate parent). B Ltd is financed through equity, and there is no external borrowing. The available amount, for debt cap purposes, is therefore nil.

B Ltd lends the funds to A Ltd. In year ended 31 December 2012, A Ltd pays interest of £20 million to B Ltd. This interest cost is incurred for the purposes of A Ltd’s construction trade.

A Ltd

In 2012 (the first year of the contract), the accounts of A Ltd show a small loss, after deduction of the interest payable to B Ltd. The loan relationship debits of £20 million are treated as trading expenses (see CFM32020). A Ltd’s CT computation, after computational adjustments but before application of the debt cap, shows a trading loss of £11 million.

B Ltd

B Ltd is an investment company. Its only income in year ended 31 December 2012 is the interest of £20 million receivable from A Ltd. It incurs expenses of management of £13 million. Before consideration of the debt cap, it therefore has profits chargeable to corporation tax of £7 million.

Debt cap position without a Section 324 election

A Ltd has financing expense amounts of £20 million, and no financing income. It therefore has a net financing deduction of £20 million, and this is also the tested expense amount for the group. Since the available amount is nil, the total disallowed amount will be £20 million.

This can only be allocated to A Ltd, which will in consequence get no deduction for the intra-group interest. Thus instead of a loss of £11 million, A Ltd will have a CT profit of £9 million.

B Ltd has financing income amounts of £20 million, and net financing income of £20 million. This is also the tested income amount for the group. Under TIOPA10/PT7CH4, the whole of B Ltd’s financing income amounts are disregarded. So instead of a £7 million profit, B Ltd has surplus management expenses of £13 million.

It may surrender £7 million to A Ltd as group relief. (It is assumed in this example that the shareholders in B Ltd are not in a position to claim consortium relief). This still leaves £6 million that can only be carried forward. If a similar position pertains in years 2 to 4, these surplus management expenses may never be relieved.

Companies A and B make a section 324 election

A Ltd and B Ltd can make a joint election under section 324. The ‘relevant amount’ they can specify in the election cannot exceed £13 million, since this is amount that is deducted for management expenses in B Ltd’s computation (section 324 (7)).

The condition in section 324 (8) is satisfied, since if B Ltd’s computations did not include a credit for the £13 million ‘relevant amount’ (in other words, it brought in only a credit of £7 million), it would have a loss.

The effect of the election (if financing expense amounts of £13 million are specified) is that for A Ltd, its financing expense amounts are reduced from £20 million to £7 million. The tested expense amount for the group, and hence also the total disallowed amount, is reduced to £7 million as a result.

Thus A Ltd’s interest debits are reduced from £20 million to £13 million. As a result, the trading loss of £11 million that it would show without the debt cap is reduced to £4 million.

In B Ltd, interest credits of £13 million are not financing income amounts for debt cap purposes. The company therefore has net financing income of £7 million, against which the £7 million can be offset. The remaining £13 million of loan relationship credits are brought into account, allowing the company’s £13 million management expenses to be utilised.


The overall position is summarised in the following tables. All amounts are in £ millions.

A Ltd

  Without debt cap Debt cap, no  
election Section 324    
Trading profits before interest 9 9 9
Trading LR debits (20) (20) (20)
Debt cap restriction   20 7
CT profit (loss) (11) 9 (4)
Group relief surrender (claim) 7 (7) Nil
Profits after group relief Nil 2 Nil
Trading loss c/f 4   4

B Ltd

  Without debt cap Debt cap, no  
election Section 324    
Non-trading LR credits 20 20 20
Disregarded under Pt 4 Sch 15   (20) (7)
Management expenses (13) (13) (13)
CT profits (losses) 7 (13) Nil
Group relief surrender (claim) (7) 7  
Profits after group relief Nil Nil Nil
Surplus management expenses c/f   6  

The effect of the election is, for both companies, to return the position to what would have been the case if the debt cap did not apply.

Non co-terminous accounting periods

An election applies for a period of account of the worldwide group. If the accounting periods of A Ltd, B Ltd or both do not coincide with that period of account, the quantitative tests at section 324 (7) and (8) are applied, and the effect of the election determined, as if the relevant period of account were an accounting period of A Ltd and of B Ltd. Apportionments of financing income, financing expenses, management expenses and other amounts should be made on a just and reasonable basis.