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HMRC internal manual

Corporate Finance Manual

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HM Revenue & Customs
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Debt cap: anti-avoidance rules: main rules: calculating the counter factual: examples

Examples of how the counter factual might be calculated under TIOPA10/S309

Example 1

A group implements a scheme whereby an external 5-year term borrowing of $500 million priced at US 3-month LIBOR + 1.25% by an overseas group company is repaid and replaced with a new external 5-year term borrowing of 750 million Turkish Lira fixed at 15%. The Turkish Lira is immediately swapped into US dollars. The overseas company enters into a forward currency contract and an interest rate swap contract. The overall effect of the scheme is that in substance the group still has a borrowing of $500 million at a slightly higher cost of borrowing, but the available amount is calculated only by reference to the interest payable on the 750 million Turkish Lira borrowing.

One of the main purposes of the company entering into the scheme was to increase the available amount. But for the debt cap, the scheme would not have been implemented and the most likely alternative is that the overseas group company would not have repaid the external borrowing of $500 million. The amount calculated under S309 for each period of account is the sterling equivalent (calculated using the average exchange rate for each period of account) of interest on a loan of $500 million at US 3-month LIBOR plus 1.25%.

Example 2

A group implements a scheme whereby one overseas group company borrows €1 billion, invests the money in another overseas group company which places the money on deposit with the same bank. The difference between the rate for borrowing and the deposit rate is 25 basis points, which represents the bank’s fee for providing the back to back arrangement. The scheme increases the available amount for a period of account of the worldwide group by the amount of interest payable on €1 billion borrowing. The main purpose of the companies entering into the scheme was to increase the available amount. But for the debt cap, the scheme would not have been implemented and so the amount calculated under S309 is nil.

Example 3

A UK member of an overseas group has a loan of £250 million, fixed at 6% from its overseas parent company, with five years of the term remaining. The loan is repaid and the UK company enters into a scheme whereby it borrows Yen 38.75 billion fixed at 1% which it immediately swaps into sterling. In addition the company enters into a forward currency contract to buy Yen in 5 years time and an interest rate swap contract. The overall effect of the various transactions is that in effect the UK company is borrowing £250 million fixed at 6.2%. Payments made under the swap contract are not included in the company calculation of its net financing expense, although they are brought into account in calculating the company’s corporation tax profits. Under the debt cap, the company only brings into account the 1% interest payable on the Yen borrowing. The UK company has entered into the scheme with a main purpose of reducing the tested expense amount. But for the debt cap, the scheme would not have been implemented and the most likely alternative is that the UK company would not have repaid the intra-group loan of £250 million. The amount calculated under S309 is £15 million for each period of account for the next 5 years.