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HMRC internal manual

Corporate Finance Manual

HM Revenue & Customs
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Debt cap: income from EEA group companies: priority of application

Interaction between TIOPA10/PT7/CH5, CH7 and CH8

TIOPA10/PT7/CH5 is a self-contained provision with its own definition of ‘financing income amounts’ (CFM92820). TIOPA10/S305(6), however, expressly states that the provisions of Chapter 7 apply to amounts that are financing income amounts for Chapter 5 purposes as they do to amounts that are financing income amounts by virtue of TIOPA10/S314.

This means, for example, that if a group treasury company has made an election under TIOPA10/S316 that its financing expense and financing income amounts are not treated as such for debt cap purposes, it cannot disregard a receipt from an EEA group company under Chapter 5.

But TIOPA10/S305(6) applies only to Chapter 7, and not to the definition of ‘tested income amount’ and ‘net financing income’ in Chapter 8. TIOPA10/S330(2)(a) refers only to a company’s financing income amounts under TIOPA10/314.

This means that financing income amounts for Chapter5 purposes are disregarded before computing a company’s net financing income or net financing deduction. In other words, the Chapter 5 provisions take priority over the remainder of the debt cap computational rules.

Example 1

A UK company receives interest of £550,000 from a member of the group resident in an EEA territory in year ended 31 December 2013, which is a period of account of the worldwide group. The interest meets the conditions to be disregarded under Chapter 5. In the same period of account, the company has interest of £100,000 receivable on a bank deposit, and pays interest of £650,000 on a loan from another group company.

The interest received from the EEA affiliate is exempted from tax under FA09/SCH15/PARA40. It is not a financing income amount under Para 55 that enters into the computation of the company’s net financing deduction or net financing income. The company therefore has, for Chapter 8 purposes, a financing expense amount of £600,000 and a financing income amount of £100,000, giving it a net financing deduction under TIOPA10/S329(2) of £550,000.

Example 2

The facts are as in example 1, except that the company has no financing expense amounts. After the £550,000 interest receivable from the EEA group company has been disregarded, it is therefore left with a financing income amount of £100,000. This is below the de minimis limit of £500,000 in TIOPA10/S331 (see CFM91240), so the company’s financing income amount is nil.