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HMRC internal manual

Corporate Finance Manual

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Debt cap: income from EEA group companies: qualifying EEA tax relief given in current or previous period of account

Conditions for qualifying EEA tax relief to be regarded as unavailable in current or previous period of account

TIOPA10/S302 sets out the two conditions that must be met before it can be said that qualifying EEA tax relief is not available in the current or any previous period.

Condition A is that no deduction calculated by reference to the payment can be taken into account in calculating any profits, income or gains that

  • arise to the payer in any current or previous period, and
  • are chargeable to any tax of the UK or an EEA territory for the current period or any previous period.

So, if the payer can or could obtain a deduction in the current period, or has or could have obtained a deduction in any previous period for the purposes of calculating profits, income or gains, then condition A has not been met.

Condition B is that no relief determined by reference to the payment can be given for the purposes of any tax of the UK or an EEA territory in the current or any previous period by:

  • the payment of a credit,
  • the elimination or reduction of a tax liability, or
  • any other means of any kind.

This goes wider than condition A. The tax relief, or reduction of tax liability, does not need to arise to the person making the payment. For example, the payment may give rise to a loss in the paying company, and the law of the EEA territory concerned may allow the company to surrender the loss to another party, which thereby obtains tax relief. In such a scenario, qualifying EEA tax relief is available, whether the paying company chooses to make the surrender or not.

If either or both of conditions A and B are not met, qualifying EEA tax relief is available and there will be no exemption of the financing income amount. Where the payer, or someone else, could have obtained a deduction or relief but didn’t, conditions A and B have not been met. See (CFM92920 for further guidance in relation to this).

Example

Mismatches between generally accepted accounting practices and how different territories treat different kinds of expenses and income can lead to instances where income is recognised in one territory, but the corresponding expense payment is recognised at a different time in the other territory.

For example, company A leases, under a 5 year finance lease, computer equipment from company B. Both are members of the same worldwide group. Under the terms of the contract only one lease payment is made at the start of the contract. If further amounts accrue these are payable at the termination of the contract.

Company A (the payer) is tax resident in an EEA territory. Under the tax laws of that territory any financing expense amounts payable under finance leases are deducted as and when they fall due under the terms of the contract.

Company B (the recipient) is tax resident in the UK. UK tax legislation follows the generally accepted accounting treatment, whereby the finance income elements of the rental payments are spread over the period of the lease.

Therefore, in years two, three, four and five of the lease there are no deductions for financing expense amounts available to company A, whereas company B is recognising the financing income on a yearly basis.

However, because company A obtained a deduction in a previous period, condition A is not met. Company B is not entitled to disregard the financing income amounts that it brings into account for years 2 to 5.

TIOPA10/S302(5)

If the only reason that conditions A and B are met (that is, there is no deduction or relief for the payment) is because

  • TIOPA10/PT7 itself has applied to disallow the deduction or limit the relief, or
  • the application of a double taxation arrangement disallows the deduction or limits the relief

then conditions A and B have not been met, tax relief would have been available to the payer (or someone else) and so the financing income has to be brought into account for corporation tax purposes by the recipient.

See CFM92940 for an example of such a situation in respect of a double taxation arrangement.