Beta This part of GOV.UK is being rebuilt – find out what this means

HMRC internal manual

Corporate Finance Manual

From
HM Revenue & Customs
Updated
, see all updates

Debt cap: anti-avoidance rules: main rules: Condition B - sum of profits of UK companies

Condition B - corporation tax profits are no less than they would be if the scheme were not implemented

The aim of condition B is to filter out transactions and arrangements that, while conferring a benefit on the group with respect to the debt cap, give no overall tax advantage.

Condition B looks at the result (or effect) of the scheme - not the purpose of the scheme but the actual outcome. The condition has two separate tests that can be considered. TIOPA10/S307(3)(a) tests whether as a result of the scheme the corporation tax profits of the UK group companies are together less than the corporation tax profits that would result from the counterfactual (the most likely alternative to the scheme) being implemented.

The words ‘profits…chargeable to corporation tax’ take their normal meaning. It is, for each UK group company, the totality of profits on which corporation tax is paid, after reduction by losses or relief brought forward, or group relief surrendered either by another UK company or a subsidiary in the European Economic Area.

All the UK group companies have to be considered when applying the test, although in practice it is likely that a number of those companies would be unaffected either way. Where the accounting period of a UK group company does not coincide with the period of account of the worldwide group, TIOPA10/S307(5) requires the profits or losses of that company to be apportioned so only the profits or losses that fall within the period of account of the worldwide group are included when testing for condition B.

Example

An overseas headed group has six UK group companies. All have the same accounting period of the group - 31 December, apart from company F which draws up accounts to 31 March and was acquired by the group on 1 September 2012.

  • Company A has corporation tax profits of £20 million for the period of account of the year ended 31 December 2012. It has in previous periods of account paid finance expenses of £40 million each year to an overseas group company.
  • Company B has corporation tax losses of £5 million for the period of account of the year ended 31 December 2012 which it surrenders to company A.
  • Company C has corporation tax profits of £10 million for the period of account of the year ended 31 December 2012. It has in previous periods of account paid finance expenses of £50 million to company D.
  • Company D has corporation tax profits of £70 million for the period of account of the year ended 31 December 2012.
  • Company E has corporation tax profits of £1 million for the period of account of the year ended 31 December 2012.
  • Company F has corporation tax profits of £12 million for the year ended 31 March 2013. Once acquired it pays £14 million finance expenses to company D

The group implements a scheme which unwinds the intra-group debt between company C and company D for the period of account of the year ended 31 December 2012.

  ### CT Profits S307(3) ### Adjustments ### CT profits S309
       
Company A £15 million   £15 million
Company B Nil   nil
Company C £10 million £50 million £60 million
Company D £70 million (£50 million) £20 million
Company E £1 million   £1 million
Company F £9 million   £9 million
Total £105 million Nil £105 million

The calculation of the corporation tax profits of company F has to take account of TIOPA10/S307(5), which time apportions the profits so only 9 months of the accounting period ended 31 March 2013 are taken into account.