Debt cap: anti-avoidance rules: main rules: meaning of ‘relevant net deduction’
The relevant net deduction is an amount used to calculate whether the debt cap rules overall have an impact on the corporation tax profits or losses
The term ‘relevant net deduction’ is of significance only for the purposes of Chapter 6. It is defined at TIOPA10/S308 as the amount by which the total disallowed amount for a group for a period of account exceeds the tested income amount. If the total disallowed amount is equal to or less than the tested income amount, then the relevant net reduction is deemed to be nil.
The total disallowed amount is the amount by which the tested expense amount is greater than the available amount. If it is not greater, then the total disallowed amount is deemed to be nil.
The relevant net deduction involves a calculation of whether there is an adjustment to the corporation tax profits or losses of the UK group companies of a group for a period of account after taking into account both whether there is a disallowance of financing expense amounts (under Chapter 3 Part 7) and a disregard of financing income amounts (under Chapter 4 Part 7).
The amount of the relevant net deduction for the purposes of Condition A in TIOPA10/S307 reflects the implementation of the scheme for the period of account in question. That amount must be compared with a notional relevant net deduction, that is, with the amount the relevant net deduction would have been if the scheme had not been implemented. The notional amount is arrived at on the basis of the assumptions set out in TIOPA10/S309 (‘the counterfactual’). The comparison between the relevant net deduction calculated as a result of the scheme being implemented and the notional relevant net deduction calculated on the basis of the counterfactual allows for consideration of the following:
- Whether the available amount is greater than it would otherwise be;
- Whether the tested expense amount is less than it would otherwise be;
- Whether the tested income amount is greater than it would otherwise be.
The comparison does not just look at one possibility; it allows all those possibilities to be taken into account.
See CFM92705 for examples of comparing the relevant net deduction where a scheme has been implemented and the relevant net deduction where the counterfactual has been implemented.