Debt cap: particular types of company: group treasury companies: periods of account beginning on or after 11 December 2012
This guidance applies to worldwide group periods of account ending before or straddling 1 April 2017.
This guidance applies to worldwide group periods of account begning before 11 December 2012. Section 316 was substantially rewritten by FA13. For details of the post-FA13 position see CFM92535.
Changes to the effects of an election
For periods of account starting on or after 11 December 2012, the making of an election became a criterion for a company to be a group treasury company for the debt cap rules. See CFM92520.
Further, if, having made an election, all or substantially all of a company’s activities are treasury activities and all or substantially all of its assets and liabilities relate to such activities, all of the company’s financing expenses and financing income are included in the election. However, if a company cannot meet the ‘substantially all’ condition, the only financing expenses and financing income included in the election are those that relate to its treasury activities. TIOPA10/S316(6) provides that the extent to which amounts relate to a company’s treasury activities will be determined on a just and reasonable basis.
A company manages a cash pooling arrangement for a number of members of the worldwide group. It holds a bank account (a concentration account) into which funds are swept at the end of each day by the operating bank, from the accounts the group members hold with the same bank when they exceed or are forecast to exceed a threshold level. Similarly, if the pool member’s balance with the bank falls below a threshold level or is overdrawn, or is forecast so to be, funds are swept by the bank from the concentration account into the pool members’ bank accounts.
The sweeps will create intra-group balances between the pool managing company and the pool members on which interest will accrue. The aggregate of the net balances due to and from the pool participants should be approximately opposite and equal to the balance due to or from the bank on the concentration account. Typically the pool managing company will make a small profit from the interest rate spread on the balances due to and from the subsidiaries. As this should be less that the spread between borrowing and deposit rates had the pool members borrowed from or deposited with the bank directly, the group gains overall and, where the internal arrangements are at arm’s length terms, the interest rates on the intra-group balances are set such that the benefit of the pooling arrangement is shared between the various group members participating in the pool and the pool managing company. The pool management company’s share of the benefit is, in effect, its fee for providing this service to members of the worldwide group and this is a typical treasury company function.
However, the same company also holds shares in a number of subsidiaries financed by substantial external borrowings. In accordance with group policy, these subsidiaries do not pay dividends, so the revenue from holding shares in these subsidiaries (together will any other income not arising from group treasury activity income amounts to less than 10% of the company’s accounting income, before expenses (its ‘relevant income’) and the holding company function does not prevent the company from satisfying the conditions to be a treasury company.
The borrowing to fund investment in subsidiaries is not, however, a function performed for or on behalf of the worldwide group. The company is simply funding its own equity investments. Accordingly, if the company otherwise satisfies the conditions to make a group treasury company election, and does so elect, the effect of TIPA10/S316(5) is that the interest on the intra-group balances created by the bank sweeps and on the concentration account are ‘relevant amounts’ that are not treated as group financing expenses or group financing income of the group. But, the interest payable on the borrowings that fund the company’s equity investments are unaffected by the election and are treated as financing expense amounts of the company.