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HMRC internal manual

Corporate Finance Manual

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HM Revenue & Customs
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Debt cap: income from EEA group companies: introduction

Overview of TIOPA10/PT7/CH5

TIOPA10/PT7/CH5 exempts financing income received by a company, which is a member of the worldwide group, from being brought into account for the purposes of corporation tax under certain circumstances.

This occurs when the finance income:

  • arises as a result of a payment by another company (‘the payer’) that is a member of the same worldwide group,
  • the payment is received during a period of account of the worldwide group to which the provisions of TIOPA10/PT7 apply, and
  • three conditions are met; broadly, the payer must be resident in a European Economic Area (EEA) territory, must be liable to tax in that territory on its profits, income or gains and must have been denied tax relief for the payment in that territory (see CFM92840 for more detail about the conditions).

If these conditions are met then the company does not have to bring into account the financing income received from the payer.

The purpose of this provision is to ensure that the debt cap complies with EU law. Where a UK resident company is denied tax relief for a financing expense amount under TIOPA10/PT7 rules, the group is ‘compensated’ by the disregard of financing income in another UK company. Chapter 5 ensures that the rules do not discriminate in favour of a UK resident payer, by ensuring that where a company resident in another EEA territory makes a financing payment for which it gets no tax relief, there is a similar disregard of financing income in the UK recipient.

Unlike the disregard of financing income under Chapter 4, where the reporting body can decide how the exemption should be allocated between companies with net financing income, disregard under Chapter 5 is tied to the actual payment received.

For example, suppose a UK company receives interest of £500,000 from an EEA affiliate, and the relevant conditions for disregard under Chapter 5 are met. The interest represents a non-trading loan relationship credit in the hands of the UK company. The company also has a financing income amount of £600,000 implicit in finance lease receipts. The company must leave out the £500,000 loan relationship credit from its tax computation. It cannot choose to disregard £500,000 of the finance lease income. Nor can the group allocate the exemption to some other UK company.

Chapter 5 refers throughout to a ‘payment’ passing from one company to another. This should be interpreted broadly to include amounts accrued in respect of a payment to be made at a future date. In the above example, if the UK company’s accounts showed accrued interest of £500,000, which fell to be brought into account as a loan relationships credit, it should be treated as a receipt for Chapter 5 purposes, even if no interest is actually paid in the period. Similarly, an accrual of discount should be treated as a payment, where this reflects cash that is expected to be received in the future.

On the other hand, fair value increases, or notional profits, do not reflect future cashflows and are not ‘payments’ for Chapter 5 purposes. For example, suppose that an EEA group company issues a convertible bond to a UK company. The UK company accounts under FRS 26, and bifurcates the convertible into a host contract and an embedded equity derivative (see CFM37610+). It writes up the host contract from the amount at which it is initially recognised to the final redemption value, bringing in credits to the profit and loss account. These credits are not representative of any payment passing from the issuer to the UK company - they are not ‘payments’ on which the Chapter 5 provisions can operate.